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PROFIT & LOSS
ACCOUNT
No one was ever ruined by taking a profit.-Stock Exchange Maxim
Dr. Jatin PancholiEmail: [email protected]: http://www.jatinpancholi.comDr. Jatin Pancholi has compiled and prepared this teaching note from various sources, as the basis for class discussion ratherthan to illustrate either effective or ineffective handling of a management situation. The handling of a management situationrequires personal guidance by a professional. To obtain copies, request permission to reproduce and to send feedback,
please send email to [email protected]. Visit website http://www.jatinpancholi.com . Those wishing to co-author nextedition of this handout are requested to contact via email.
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Introduction
Annual Report – Financial Statement – Balance Sheet
– Profit & Loss Account
Balance Sheet is a ‘position’ statement.
P&L A/c is a ‘flow’ statement.
Companies Act: – A Balance Sheet as on the last day of the
financial year
– A Profit & Loss Account for the financialyear.
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P & L A/c
P&L A/c is also called ‘Income
Statement’. Income is calculated as the difference
between revenues and expenses. – Revenues: from operations
– Expenses: specific product/service/period
Accountants have agreed to use theaccrual basis of accounting rather thanthe cash basis.
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Revenues and Expenses
Revenues - gross increases inowners’ equity arising from
business operations/delivery ofgoods-services to customers
Expenses - decreases in owners’ equity
that arise because goods or services aredelivered to customers
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TRANSACTION
INCOME EXPENDITURE
Revenue
Income
Capital
Income
Revenue
Expendi
ture
Capital
Expend
iture
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TRANSACTION
INCOME EXPENDITURE
Revenue
Income
Capital
Income
Revenue
Expendi
ture
Capital
Expend
iture
P & L A/cIncome (Revenue Income)LessExpenditure (Revenue Expenditure)NET PROFIT/LOSS
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TRANSACTION
INCOME EXPENDITURE
Revenue
Income
Capital
Income
Revenue
Expendi
ture
Capital
Expend
iture
BALANCE SHEETSOURCES OF FUNDS (Liabilities)
(Capital Income)
APPLICATION OF FUNDS (Assets)
(Capital Expenditure)
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TRANSACTION
INCOME EXPENDITURE
Revenue
Income
Capital
Income
Revenue
Expendi
ture
Capital
Expend
iture
BALANCE
SHEETP & L A/C
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P & L A/c CONCEPTS
ACCOUNTING PERIOD
– Expenditure during A/c period which arealso expenses of that period. –
– Expenditure during the A/c period whichwill become expense only in future periods
– Expenditure during the previous A/c period
which will become expenses during thecurrent A/c period
– Expense of the current A/c period whichhave not yet been paid
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The Accounting Time Period
Companies also prepare statementsfor interim periods, generally on aquarterly or monthly basis.
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P & L A/c CONCEPTS (contd.)
REALIZATION CONCEPT
– ‘point of time’ or revenues earned
– recognition of revenues
ACCRUAL CONCEPT – profits are measured by change in Owners’ equity
– revenues increases OE, expenses decreases OE
MATCHING EXPENSES WITH REVENUE
– relevant period
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Revenues and Expenses
Income (profit) - the excess of revenuesover expenses
– Revenues - Expenses = Profit
Retained earnings - additional owners’
equity generated by income or profits
– Revenues increase owners’ equity. – Expenses decrease owners’ equity.
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Recognition of Revenues
Recognition - a test to determinewhether revenues should be recorded inthe financial statements
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THE DUET: BS & P&L
BS provides a snapshot of an entity’s
financial position at an instant in time.
The P&L A/c provides a moving pictureof events over a span of time andexplains the changes that have taken
place between BS dates.
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Thank YouHang in there! Halfcourse is over…
Yeah, that’s
easy for you to
say!
Dr. Jatin PancholiEmail: [email protected]
Website: http://www.jatinpancholi.comDr. Jatin Pancholi has compiled and prepared this teaching note from various sources, as the basis for class discussion rather than to illustrate either
effective or ineffective handling of a management situation. The handling of a management situation requires personal guidance by a professional. Toobtain copies, request permission to reproduce and to send feedback, please send email to [email protected]. Visit website
http://www.jatinpancholi.com. Those wishing to co-author next edition of this handout are requested to contact via email.