 |
| Business man celebrating profits earned from the factory |
Meaning:
The
purpose of a business is supply goods and services to meet the needs of the
society and in the process earn a little over and above what it spent. This
extra sum the business earns is called profit.
Profit is essential for the business to reward the owners/ shareholders who
have invested their money in the business in the form of dividends, to set
aside a tidy sum for the rainy day
and for expansion and growth.
A
business is said to have made a profit when sales, service and other income
exceed the value of goods and services consumed. Similarly if the cost of
producing the goods and services is more than the income, the business is said
to have made a loss.
The
profit and loss account lists all the revenues and incomes and various expenses
and finally discloses the profit or loss made by the organization.
Example:
M/s.Old
& Conservative Ltd.
|
M/s.New
& Extravagent Ltd.
|
|
Sales
|
1500.00
|
1520.00
|
All
Costs & Expenses before Depreciation, Interest, Tax and Appropriations
|
800.00
|
1410.00
|
EBDITA
|
700.00
|
110.00
|
Depreciation
|
30.00
|
100.00
|
Earnings
after Depreciation but Before Interest, Tax and Appropriations (EBITA)
|
670.00
|
10.00
|
Interest
|
0.10
|
70.00
|
Earnings
after Depreciation and Interest but
Before, Tax and Appropriations (EBTA or EBT)
|
669.90
|
-60.00
|
Non-Operating
Income
|
300.00
|
50.00
|
Profit
Before Tax (PBT)
|
969.90
|
-10.00
|
Corporate
Income Tax
|
320.07
|
0.00
|
Net
Profit or Profit After Tax (PAT)
|
349.83
|
-0.10
|
The
example shows that M/s.New and Extravagant Ltd.’s costs exceed the incomes and
as a result it has ended-up with a loss.
The
profit and loss account is one of the three important financial statements, the
other two being the balance sheet and cash flow statement.
The profit
and loss account covers transaction for a certain period – say a month or a
quarter or an year.
Conclusion:
To sum up, the
profit and loss statement is a vital financial statement that shows the profit or loss made by the company during a certain period. It also explains the changes in the balance sheets or
statements of affairs drawn-up on two dates and thus is a supporting document
to the balance sheet.