- In accounting world, an Income Statement is called as "Profit and Loss Report". In addition, the word Revenue is often used in place of the word Income. An Income Statement is used to inform you about the income earned, expenses incurred, and the total profit or loss in a particular period. Two common periods for creating an income statement are monthly and annually.
- This report summarizes all Income (or sales), the amounts that have been or will be received from customers for goods delivered or services rendered to them, and all expenses, the costs that have arisen in generating revenues.
- Normally Income Accounts accounts are used to track income earned during the process of operating your business. The income of a business comes from sales to customers or fees for services or both. Some of the common names for income accounts are: Income from Sales, Income from Freight, Income from misc. sources as property, shares.
- As discussed in last post  Balance Sheet is a â€˜positionâ€™ statement whereas Profit & Loss Account is a â€˜flowâ€™ statement.
- The need of P & L report is enforced because of companies Act, which enforce to produce Balance sheet and P&L account.
- A Balance Sheet as on the last day of the financial year
A Profit & Loss Account for the financial year.
Profit and Loss A/C
What you suppose to remeber is :
P&L A/c is also called â€˜Income Statementâ€™.
Income is calculated as the difference between revenues and expenses.
Revenues: from operations
Expenses: specific product/service/period
Accountants have agreed to use the accrual basis of accounting rather than the cash basis
The term Revenue and expense
Revenues - gross increases in ownersâ€™ equity arising from business operations/delivery goods-services to customers
Expenses - decreases in ownersâ€™ equity that arise because goods or services are delivered to customers
In term of accounting, this can be described as:
Revenue Account :This is the income account. Whenever a revenue account balance is changed, it leads to a change in the Assets / Liabilities account. Revenue account is not a control account, itâ€™s treated as an operative account. At the beginning of a new accounting cycle, this account is turned to zero. Entire balance is transferred to the retained earnings account.
Expense Account : This is the operations expenditure account. Whenever an expenditure account balance is changed, it leads to a change in the Assets / Liabilities account. This account behaves just like the Ownerâ€™s equity account as an increase in this account essentially means a decrease in ownerâ€™s equity. Expense account is not a control account, itâ€™s treated as an operative account. At the beginning of a new accounting cycle, this account is turned to zero. Entire balance is transferred to the retained earnings account.
Spliting the above , the balance sheet can be drived on the basis of these. You can see the details in one of last post .
where as Profit and Loss report can be best build and understand as:
Profit and Loss A/c Concept
Profit and Loss can be based out of these basic concept as discussed in one of my post  .
- Expenditure during A/c period which are also expenses of that period.
- Expenditure during the A/c period which will become expense only in future periods
- Expenditure during the previous A/c period which will become expenses during the current A/c period
- Expense of the current A/c period which have not yet been paid
What is important here is
- â€˜point of timeâ€™ or revenues earned
- recognition of revenues
Normally companies measure there profits by change in Ownersâ€™ equity , revenues increases OE, expenses decreases OE
MATCHING EXPENSES WITH REVENUE
- Income (profit) - the excess of revenues over expenses
- Revenues - Expenses = Profit
- Retained earnings - additional ownersâ€™ equity generated by income or profits
- Revenues increase ownersâ€™ equity.
- Expenses decrease ownersâ€™ equity.
Balance sheet and P&L- Driven by Transaction
In last post we have seen BS provides a snapshot of an entityâ€™s financial position at an instant in time., where as P&L A/c provides a moving picture of events over a span of time and explains the changes that have taken place between BS dates. This can be best described as below figure.