Profit and Loss Account – P&L meaning, definition, and advantages. The company prepares four types of financial statements every quarter and every year: The balance sheet, P&L Statement, Cash flow statement, and last the statement of retained earnings. In the profit and loss report, also referred to as the income details; the company lists out all its expenses and revenue. When revenue exceeds expenditures, the company is earning a profit. As well as when the expenditures are more than the company revenue, the company has incurred a loss.
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It is counting by taking a business’s total revenue and subtracting the total expenses, including tax. If the report figures out we know as net income is negative, the company has earned a loss; and, if it is positive, the company has made a profit. A P&L account reports and statements are important to investors and traders as they offer an in-depth look at company performance. Generally, one negative profit & loss is seen as a warning sign, while a few in succession are taken to mean that there could be something fundamentally wrong with the company’s operations.
Meaning and Definition of Profit and Loss (P&L) Account:
What is a profit and loss (P&L) account? A P&L account shows a company’s revenue and expenses over a particular period of time; typically either one month or consolidated months over a year. These figures show whether your company has earned a profit or a loss over that time period. P&L accounts show your net revenue and expenses; and, also show whether your profession has earned more income than it has spent on its running costs.
If that is the case, then your business has earned a profit. The P&L account represents the benefit of a profession. It cannot, for example, show you if you are running out of cash as you construct stock. Overall want to know what net profit & loss increase or decrease, for this kind of insight, you need a balance sheet. The P&L account is also known as a P&L report, an income statement, a statement of operation, a statement of financial results, or an income and expense statement.
Benefits or Advantages of Profit and Loss (P&L) Account:
The following benefits and advantages of the profit and loss account below are:
- For information on Net results; They give the actual information about net profit or a net loss of the business for an accounting period. So, it is very useful to know the financial condition of the firm.
- For the knowledge of Total Expenses; They give actual information about indirect expenses.
- Assessment of Ratio; They serve to assess and fixate the ratio between net profit to sales; and, the ratio between net profit to operating expenses. It helps to understand the direction capacity of the firm.
- Controlling of Profit and loss; They help in control and detaining indirect or non-expenses by providing important information about these expenses.
Disadvantages and limitations of Profit and Loss (P&L) Account:
The following disadvantages of the profit and loss account below are:
The main disadvantage that comes to mind when thinking about P&L accounting is accuracy. Data on depreciation and asset value is usually subjective or volatile; and, it is difficult to attribute accurate values to these fields. Nevertheless, these factors weigh heavily on a P&L account.
Also, when a manager is constantly using a P&L account to make his/her business decisions, choices end up being made on a relatively small sample of data, with only the short-term in mind.
The P&L account is ready and prepares for a certain period and hence it is an interim report. In an absolute sense, the true profits or losses can ascertain only after the concern has run its entire life; a point at which all the inputs to the business from its start-up to its final liquidation can ascertain and can arrive at the precise profit for its whole life.
But since this is not possible, the P&L account prepares at regular intervals by estimating what proportion of the life profit of the company has been earned in a particular period. To arrive at this estimate, the accountant has to make many assumptions about the future of the company and the uncertainties that surround it.
The profit as disclosed by the P&L account is not absolute but is relative as the profit & loss account is based upon various accounting conventions and concepts, and depends upon the correct opinion of revenue and count of expired costs.