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PROFIT & LOSS

ACCOUNT

No one was ever ruined by taking a profit.-Stock Exchange Maxim  

Dr. Jatin PancholiEmail: email@jatinpancholi.comWebsite: http://www.jatinpancholi.comDr. Jatin Pancholi has compiled and prepared this teaching note from various sources, as the basis for class discussion ratherthan to illustrate either effective or ineffective handling of a management situation. The handling of a management situationrequires personal guidance by a professional. To obtain copies, request permission to reproduce and to send feedback,

please send email to email@jatinpancholi.com. Visit website http://www.jatinpancholi.com . Those wishing to co-author nextedition of this handout are requested to contact via email.

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Introduction

Annual Report – Financial Statement – Balance Sheet

 – Profit & Loss Account

Balance Sheet is a ‘position’ statement. 

P&L A/c is a ‘flow’ statement. 

Companies Act: – A Balance Sheet as on the last day of the

financial year

 – A Profit & Loss Account for the financialyear.

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P & L A/c

P&L A/c is also called ‘Income

Statement’.  Income is calculated as the difference

between revenues and expenses. – Revenues: from operations

 – Expenses: specific product/service/period

Accountants have agreed to use theaccrual basis of accounting rather thanthe cash basis.

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Revenues and Expenses

Revenues - gross increases inowners’ equity arising from

business operations/delivery ofgoods-services to customers

Expenses - decreases in owners’ equity

that arise because goods or services aredelivered to customers

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TRANSACTION

INCOME EXPENDITURE

Revenue

Income

Capital

Income

Revenue

Expendi

ture

Capital

Expend

iture

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TRANSACTION

INCOME EXPENDITURE

Revenue

Income

Capital

Income

Revenue

Expendi

ture

Capital

Expend

iture

P & L A/cIncome (Revenue Income)LessExpenditure (Revenue Expenditure)NET PROFIT/LOSS  

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TRANSACTION

INCOME EXPENDITURE

Revenue

Income

Capital

Income

Revenue

Expendi

ture

Capital

Expend

iture

BALANCE SHEETSOURCES OF FUNDS (Liabilities)

(Capital Income)

APPLICATION OF FUNDS (Assets)

(Capital Expenditure)

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TRANSACTION

INCOME EXPENDITURE

Revenue

Income

Capital

Income

Revenue

Expendi

ture

Capital

Expend

iture

BALANCE

SHEETP & L A/C

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P & L A/c CONCEPTS

ACCOUNTING PERIOD

 – Expenditure during A/c period which arealso expenses of that period. – 

 – Expenditure during the A/c period whichwill become expense only in future periods

 – Expenditure during the previous A/c period

which will become expenses during thecurrent A/c period

 – Expense of the current A/c period whichhave not yet been paid

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The Accounting Time Period

Companies also prepare statementsfor interim periods, generally on aquarterly or monthly basis.

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P & L A/c CONCEPTS (contd.)

REALIZATION CONCEPT

 – ‘point of time’ or revenues earned 

 – recognition of revenues

ACCRUAL CONCEPT – profits are measured by change in Owners’ equity 

 – revenues increases OE, expenses decreases OE

MATCHING EXPENSES WITH REVENUE

 – relevant period

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Revenues and Expenses

Income (profit) - the excess of revenuesover expenses

 – Revenues - Expenses = Profit 

Retained earnings - additional owners’

equity generated by income or profits

 – Revenues increase owners’ equity.  – Expenses decrease owners’ equity. 

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Recognition of Revenues

Recognition - a test to determinewhether revenues should be recorded inthe financial statements

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THE DUET: BS & P&L

BS provides a snapshot of an entity’s

financial position at an instant in time.

The P&L A/c provides a moving pictureof events over a span of time andexplains the changes that have taken

place between BS dates.

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Thank YouHang in there! Halfcourse is over… 

 Yeah, that’s

easy for you to

say!

Dr. Jatin PancholiEmail: email@jatinpancholi.com

Website: http://www.jatinpancholi.comDr. Jatin Pancholi has compiled and prepared this teaching note from various sources, as the basis for class discussion rather than to illustrate either

effective or ineffective handling of a management situation. The handling of a management situation requires personal guidance by a professional. Toobtain copies, request permission to reproduce and to send feedback, please send email to email@jatinpancholi.com. Visit website

http://www.jatinpancholi.com. Those wishing to co-author next edition of this handout are requested to contact via email.