The profit and loss account is primarily a summary of a company’s business transactions and shows whether it has made a profit or loss during a particular account period. In fact, by deducting the total expense from the total income, you can calculate the profit or loss of a business. Along with the balance sheet, it is one of the key financial statements that make up the legal accounts of a business.

Basically, this type of account shows the following information for a company:

• Sales revenue earned by business
• Cost of sales incurred by the company.
• Other operating costs incurred by the business
• Profits / losses obtained by the company.

The profit and loss account generally has two columns: one for the current accounting period and one for the previous accounting period. Any costs directly associated with the generation of sales and also any other operating costs represent debits in the profit and loss account. In addition, the other operating costs are usually assigned to categories such as administrative or selling expenses. The company’s sales revenue represents a credit to the account.

The basic construction is as follows:

Net Sales = Gross Sales – (Discounts + Discounts + Returns)

Cost of Goods Sold = Initial Stock + Purchases – Final Stock

Gross profit = Net sales – Cost of goods sold

Net profit = Gross profit – Other operating costs

The profit and loss account is often considered a key indicator of how well a company is doing. However, when interpreting the figures, it is important to look at them in conjunction with the balance sheet and other financial information included in the accounts. Lastly, you should also keep in mind that the information in the profit and loss account is historical and therefore budgets, forecasts and other management accounting information are likely to be crucial in helping you make financial decisions and / or future commercials.