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Understanding “Profit and Loss (P&L)” from Techies Mind

Profit and Loss A/C

What you suppose to remeber is :

The term Revenue and expense

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, it’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 Owner’s equity account as an increase in this account essentially means a decrease in owner’s equity. Expense account is not a control account, it’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 [1].

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 [2] .

ACCOUNTING PERIOD

  • 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

REALIZATION CONCEPT

What is important here is

  • ‘point of time’ or revenues earned
  • recognition of revenues

ACCRUAL CONCEPT

Normally companies measure there profits by change in Owners’ 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 owners’ equity generated by income or profits
    • Revenues increase owners’ equity.
    • Expenses decrease owners’ equity.

Balance sheet and P&L- Driven by Transaction

In last post we have seen BS provides a snapshot of an entity’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.

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