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PROFIT AND LOSS ACCOUNT

Meaning

Income statement is prepared with the item of expenses ,losses, income and gain with a view to ascertain the of net profit or loss in the business is known as profit and loss account.

Need/purpose and Important of profit and loss account


(1)Knowledge of net profit or net loss-The purpose of preparing profit and loss account is to ascertain the amount of net loss . This is the actual profit available to the proprietor and credited to his capital account .In case of net loss proprietors capital account will be debited. The net profit is calculated after charging all indirect expenses. (2)Ascertaining ratio between net profit and net sales-we get net profit from profit and loss account .This net profit is matched with the net sales to calculate net profit ratio. This ratio is compared with the desired net profit ratio and if there is any short coming, that will removed .This ratio can also be compared with the ratio of previous years and effective future line of action can be taken (3) Calculation of expenses ratio to sales- Expenses ratio to sales is calculated. We can calculated individual expenses to sales ratio and compare it with desire expenses ratio and with the of previous years. It will always be in the interest of the firm that the expenses ratio should be the minimum. (4) Comparison of actual performance with desired performance- The actual performance of the business is available with the profit and loss account as regards net profit, individual expenses and individual income. (5) Maintaining provision and reserve- We have to maintain certain reserves and provision to meet our future uncertainties .The amount of provisions reserves and funds to be maintains depends upon net profit earned by the firm. (6) Determining future line of action- We can adopt effective future line of action on the basis of the information available from profit and loss account regarding net profit and other expenses.