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Introduction to bookkeeping and accounting
Introduction to bookkeeping and accounting

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3.3 The profit and loss account

The profit and loss account is a financial statement which sets out the results of the trading activities of an enterprise in a detailed breakdown of income generated and expenses incurred. Different businesses have different breakdowns of income and expenses and hence present financial information in the profit and loss account in different formats. However, the overall or net profit recorded in the profit and loss account for any business is also the amount by which the balance sheet value of the business has increased.

What are the formats of the profit and loss account?

The format of the profit and loss account (P&L account) will vary depending on whether the business is a manufacturing concern (i.e. making goods they sell) or a non-manufacturing concern (i.e. either buying goods for resale or selling a service for a fee).

Information point

Whatever the nature of the business, each type of income or expense has its own account in the nominal ledger like the balance sheet items we looked at in Section 1.

What is the difference between net profit and the other important form of profit?

The most important profit for a business is the net or overall profit. It is the increase in the financial value or worth of a business after all expenses have been deducted from income. The second most important form of profit is the gross profit. This is the difference between sales and the cost of the goods or stock sold, known as the cost of sales. Gross profit is thus the profit earned by a business before the overheads or general expenses of running the business such as advertising, rent, salaries, and heating and lighting are deducted. The difference between gross profit and net profit will become clearer to you as we look at a number of examples in this section.