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Profit and Loss Account | Objectives, Importance

The profit and loss account is the second step of a final account which is prepared to know the amount of net profit or a net loss. It is required immediately after preparing a trading account. It records the loss and indirect expenses on the debit side and profit and indirect incomes on the credit side. The expenses which are not located directly to the cost center are indirect expenses. 

dices showing profit and loss

The income received to accept the direct sales of goods or services are indirect income. The difference between the debit and credit total of the profit and loss account is the net profit or a net loss. The exceed in debit total than a credit total of the profit and loss account is net loss and excess of credit total then they were a total of profit and loss account is net profit.

» Items included in profit and loss account.

The objective of profit and loss account

The objectives of profit and loss accounts are as follows:

  1. To show the amount of net profit or net loss of a firm during a given period of time.
  2. To provide information about indirect expenses like office and administrative expenses, selling and distribution expenses, financial and other expenses, and the loss of a period.
  3. To provide Information about various incomes and gains like rent received, the commission received, dividend received, interest received, profit on sales of asset, etc.
  4. To enable management for making various plans, policies, and strategies by providing various information.
  5. To help for the comparative study about the various data of different years.
  6. To compute various ratios like net profit ratio.
  7. To facilitate the preparation of a balance sheet by a sole training net profit or a net loss.

Importance and advantages of profit and loss account

The advantages of profit and loss account are as follows:

  1. It helps to know the amount of net profit or net loss made in an accounting period.
  2. It helps management to find out the reason for profit made or loss incurred in business.
  3. It provides detailed information about indirect incomes and indirect expenses of a firm during the accounting period.
  4. It helps to determine the taxability of a firm.
  5. It computes the net profit or net loss of a firm for a period.
  6. Which helps to prepare different plans, policies, and strategies after supplying reliable information.
  7. It facilitates the preparation of a balance sheet by calculating net profit or a net loss.

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