The financial encyclopedia uses cookies to improve your user experience. Find out more here!



 

 


 

Profit and loss account
 

 

The results of al trading organizations and businesses operated for profit are usually shown in a profit and loss account. By tradition this account tends to be in three parts: the trading account, the profit and loss account proper and the profit and loss appropriation account. Such an account is usually, though not necessarily, account is usually, prepared on an annual basis. 

The trading account shows the turnover for the period and, when the cost of sales is deducted therefrom, the gross profit to be transferred to the next section. This, the true profit and loss account, shows additional income not directly connected with trading, and after deducting all expenses necessarily incurred in marketing and administration it gives the net profit for the period under review. This figure is adjusted for any extraordinary items of adjusted for any extraordinary items of charged on profit, which leaves net profit after taxation to be carried down into the appropriation account, where the division of the spoils is detailed, i.e. the net profit after tax is either apportioned to the proprietors or transferred into reserves to be ploughed back into the business as an investment in future years.

The profit and loss account of a limited company is governed by the provisions of the Companies Acts, particularly the Fourth Schedule to the 1985 Companies Act, which replaced the Eighth Schedule to the 1948 Act. The Schedule to the 1985 Act provides a choice of four specific formats, one of which must be used specific formats, one of which must be used though this obligation is modified by the overriding requirement to provide a true and fair view of the profit or loss of the company during the financial year. This requirement may make deviation from the standard format necessary in exceptional circumstances, though the onus is on the directors and auditors to demonstrate the necessity.


Reference: The Penguin Business Dictionary , 3rd edt.