Profit and loss account

A. The profit and loss account (P & L), called the income statement in the US, shows the profit or loss a company has made over a period of time. In a simple case the profit or loss equals the increase or decrease in the company's assets as shown on the balance sheet. This is rarely exactly true and the statement of total recognised gains and losses reconciles the P &L to the changes in equity shown on the balance sheet

The P & L can be misleading and there are a number of accounting techniques that can shift losses (or gains, although that is rarer) from the P & L to the balance sheet. The P & L should be looked at in conjunction with the notes, the cash flow statement (which is harder to manipulate) and the other accounting statements.

The shortest possible P & L would be: sales less costs = total profit. In accordance with the accrual principle, costs and revenues are matched so that, for example, sales and purchases made on credit during a year, but perhaps not yet paid for, will be included in the P & L for the year.

B. Understanding the Profit and Loss Account.

The following statements refer to items in the Profit and Loss.

1) Turnover means annual sale. True False

2) Overheads include distribution and administrative costs.

True False

3) Gross profit means profit after tax. True False

4) Retained profit means profit after distribution of dividends.

True False

5) Materials are included in cost of sales. True False

6) The preference dividend is affixed percentage and so offers less risk than ordinary shares. True False

Unit 3

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