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Understanding a profit and loss account

Understanding a profit and loss account.In order to understanding a profit and loss account, you need to know what profit is. Profit is what a business works for. It is the reward that comes from running a successful business.


Along with profit comes loss.A business can take a couple different directions at any time during its existence. However, for the most part, if there is a higher risk, there will usually be a higher, profit or loss depending on the success of the business idea.

The process of recognizing a falling business makes it easier to know when to look at moving resources and profits to a different source, therefore creating a more secure move for the economic growth.

Without the right information, you will find that it is all a guessing game. Who wants to guess at these types of important choices?

In accounting, there are several steps that are taken to come up with the right profit and loss information. The profit and loss account is also known as a balance sheet.

Profit = revenue less the cost is the best way to look at measuring profit. There are two parts to measuring this information. First recording the financial data, second measuring that result.

The recording part of this is simply accounting. The measuring of that data is looking at where the profits are moving, where they are at, and what is happening with them.

You can look at the movement of profits in three ways.

a. A retained profit, this is kept for future investment and growth.
b. The returned profit, like a dividend.
c. Paid profit, like in taxes.

The main goal of a profit and loss account is to monitor the three parts of profit. From that you have these different areas, which help to make sure where the profit is going.

The main components in the profit and loss account are:

- Sales
- Direct costs
- Gross profit
- Indirect costs
- Net profit
- Taxation
- Director's savings
- Investment in business

This is a basic explanation of what you would be looking at.

Total Sales$164,000

Total Direct Costs $132,000

Gross Profit$36,000


Net Profit$19,100


Profit Retained $4,100

The trading account is the account that records the money that is coming in, revenue and the money that is going out, costs, that the business has.

The profit and loss account proper is the gross profit with the added costs of the business to it. This also includes the business overhead.

The appropriation account shows how the profit is appropriated and divided.

This is all-important if you want to have accurate information for the profit and loss account and decisions that are made with that information. There can be significant issues arise if the information that is obtained is incorrect.

There are many good reasons that companies use the profit and loss account. It includes the tracking of profit, it can be used for comparisons, and finally it is used to fix problems.

With the right information a business can use the profit and loss account information to make educated business decisions that will benefit the company overall.

This overall information should make it easier to understand a profit and loss account. However, as with any major business decision, it is a good idea to hire a professional to handle this type of calculations, in order to help you to make best-informed decision. Because if the information is not correct, decisions made would be incorrect also.

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