What Is A Profit And Loss Account?

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What Is A Profit And Loss Account?

As a business owner, it is important to have a clear understanding of your finances. This includes knowing what a profit and loss account is and how to read one. A profit and loss account, also called an "income statement," is a financial document that summarises a company's revenue and expenses over a period of time. This period can be monthly, quarterly, or annually.

The main purpose of a profit and loss account is to determine whether a company has earned more money than it has spent over the course of the period in question. If the answer is yes, then the company has made a profit. If the answer is no, then the company has incurred a loss.
 
A profit and loss account typically contains three sections: revenue, expenses, and net income.

Revenue is the total amount of money that a company has earned during the period in question. This can come from sales of goods or services, interest on investments, or other sources.

Expenses are the total amount of money that a company has spent during the period in question. This can include things like cost of goods sold, employee salaries, rent, marketing costs, and other operational expenses.

Net income is calculated by subtracting total expenses from total revenue. This number represents either the profit or loss that a company has made over the course of the period.

A profit and loss account covers a period of time, typically monthly, quarterly or yearly.

And it's important to note that it does not include all spending of a business, for example, it does not show loans and loan payments, or asset purchases.

 
A profit and loss account (also called an income statement) is an important financial document for any business owner to understand. It summarises a company's revenue and expenses over a given period of time so that you can determine whether your business has made a profit or incurred a loss over that time frame. 


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About the Author

Annette Ferguson 

Owner of Annette & Co. - Chartered Accountants & Certified Profit First Professionals. Helping online service-based entrepreneurs find clarity in their numbers, increase wealth and have more money in their pockets.

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