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Thursday, November 3, 2016

What is a Profit and Loss Account?

A business man celebrates profits earned from the industry
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.

Further Reading:

How to Calculate Rate of Interest from Actual Ineterst?

Interest is computed by applying rate of interest on the principal. If we have the principal and actual interest, we can derive rate of interest by dividing the interest by the principal and multiplying the result by 100.

Following example make things clear:

Calculation of Interest with rate of interest:

Formula:




Rate of interest to calculation of actual interest:







Interest (I)
=
Principal × Rate of Interest








Example:




 Example A
 Example B
Principal
 25,00,000
 100
Rate of Interest
10%

Actual Ineterst
 2,50,000
 10

 


Calculation of Rate of Interest from interest and Principal:

Formula:




Example 2







Interest



Rate of Interest
=
×
100



Principal




Example:


Actual interest to calculation of rate of interest:


Principal
 25,00,000
 100
Actual Interest
 2,50,000
 10
Rate of Interest
10.00%
10.00%