Financial AccountingProfit and Loss statement

Profit and Loss statement

Profit and Loss Statement

Profit and Loss Statement/ STATEMENT OF Comprehensive Income

In a Profit and Loss statement, performance for the period under consideration is presented in a specific and predetermined format. The closing balances of all the nominal accounts in the trial balance are posted in the trading and Profit & loss account. The summary of both aforementioned accounts is presented in the form of a Statement of Profit and loss for the period.

The profit and Loss statement is comprised of the following two accounts;

1. Trading account:

Through a trading account, the performance of the business in its core activities is presented in a standard format. 

A business organization can earn revenue from many avenues and incur costs to perform various activities. However, core activities are those main operations for which business was constituted. 

For example, a bookseller can earn profits by placing the surplus funds into the savings account of banks, however, the core activity of a bookseller will be selling books and in a trading account, only revenues from the sales of books are presented. 

The main components of a trading account are 

Sales revenue:  

Revenue earned during the period under consideration from the core activities of a business. Whereas the revenues earned from the other sources and activities are separately reported under the head of other income in the profit and loss account.

Cost of Services/ Cost of Goods Sold (COGS)

The second component of trading accounts comprises all the costs directly incurred to perform the core activities of a business. Taking our previous example of a bookseller, the business may incur the heavy cost of purchasing stationery. However, the cost of stationary resold will be considered as the Cost of Good sold and will be reported through the Trading account, whereas the cost of stationery used for the other purposes e.g. administrative or selling purposes will be recorded in the profit and loss account. 

Cost of services/ goods sold includes all those direct costs incurred to earn the revenues from the core business of an organization are presented.  This includes the following costs : 

  1. Direct Labor: Cost of salary of those employees directly involved in providing the services for core business or manufacturing of core goods and;
  2. Direct Material: Purchase cost of all the materials/ goods consumed 
  • To produce final products in the manufacturing business.
  • For reselling the products purchased.

Carriage inward is added whereas material returned is subtracted from the direct costs of material during the period.

  1. Any other directly attributable cause is included as direct overhead.

 All the above-stated costs are aggregated and presented as the cost of goods sold or the cost of services.

The above-calculated cost of goods sold or cost of services are subtracted from the revenue i.e first component of the trading account hence gross profit for a period is calculated.

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2. Profit and loss account 

In preparing a profit and loss account for a business all the revenue earned and costs incurred during the period are presented in a summarized and predetermined manner. 

Traditionally a profit and loss account starts from the gross profit calculated during the preparation of a trading account. Moving forwards following types of expenses and incomes are adjusted till the calculation of net profit for the reporting period.

Selling and Marketing:

All the expenses incurred to carry out the selling, distribution, and marketing activities of the business are grouped under the head of selling and marketing expenses.

Administrative Expenses:

All expenses incurred on administrative operations for example salaries of head office staff are reported under this group as admin expenses. 

Other Expenses:  

In direct expenses can not be classified under selling and admin expenses are classified as other expenses. For example, during the reporting period disposed of fixed assets at loss, the amount of loss at disposal will be reported under the miscellaneous/ other expenses.

Other Income:

Any income earned from non-core activities is categorized as other income and reported after selling and administrative expenses.

Operating Profit:

Selling, distribution, and administrative expense along with any other non-core income/expenses are added and operating costs are calculated.  Operating costs are subtracted from the gross profit calculated by preparing a trading account and operating profit is derived. Operating profit is also donated as profit before interest and tax.

Finance cost:

interest costs incurred during the period are deducted from the operating profit described above profit before tax is calculated. 

Tax Expense:

Tax expense during the period under consideration is subtracted from profit after tax and the net profit figure is concluded.

The amount of net profit during the period is the profit earned by the business for the owner and is distributable to the owners of the business.  The amount of net profit is added as the retained earnings in the equity portion of the balance sheet.

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