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What Is A Profit and Loss Account?

Simply put, a profit and loss account show a business’s revenue and expenses at any given time. They often span over a month or various months within a year. Consider it a financial statement that illustrates the health of a business.

A profit and loss account will shed light on the state of a business’s operation and will demonstrate whether a business has made a profit or loss over a set period.

If a business has earned more income in that time period than it has spent, the business will have made a profit.

A profit and loss account usually consist of a business’s credits, then deductions are made – including overheads, cost of sales and allowances. Ultimately, this will provide a business with a figure that indicates whether it is in net profit or net loss.

A profit and loss statement is essential for smart business management. But the buck does not end there, as it also helps a business to calculate income and corporation tax. If a business incorrectly files either of these, it could face huge penalties and fines, so it is necessary to get the profit and loss account right.

A profit and loss statement and a balance sheet are the two most important statements in business accounting, so it is important to get them right. Together, they enable a business to review its financial health and both will need to be presented to a lender.

A profit and loss statement will be required, should a business decide to apply for a loan.

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