Page 140 - Account 10

Trading A/c and Profit and Loss A/c are also, termed as an income statement if it is
prepared in the form of a statement i.e. the add and less schedule.

Key Point Profit and loss account is the second step of final account prepared to
ascertain net profit or net loss of the business.

7. Objectives of Profit and Loss Account

There are various objectives of preparing profit and loss A/c. The main objectives
are mentioned below:
i. To find out the net profit/loss during a year in order to measure the general efficiency
of a business conduct.
ii. To facilitate the assessment of tax liability by ascertaining the net profit i.e. the taxable
income. by comparing the total of all permissible incomes, gains and profits on one
side i.e. credit side and expenses and losses on the other i.e. debit side.
iii. To identify each head of indirect expenses and losses and make the necessary control
over them by eliminating wastage, leakage, mishandling etc.
iv. To compare the different relevant figures like net profit and gross profit or losses,
net profit and sales, net profit to the total of non-production expenses, gross profit
to such non-production expenses, etc. Similarly, the current year’s gross profit, net
profit and expenses can also be compared with those of the previous years.
v. To facilitate the preparation of balance sheet by transferring the profit or loss to the
capital A/c. The net profit increases the capital and is thus, added to it and the net
loss decreases the capital and thus, deducted from it.

8. Importance and Advantages
A Profit and Loss A/c is very important financial document of a business concern.
It ascertains the net profit/loss of a concern for each accounting period by means of all
the revenue incomes plus gains and revenue expenses plus losses. Thus, it measures the
general efficiency of the concern. The importance of a profit and loss A/c can be studied
in terms of the following advantages:

i. Finding Out Net Profit/Loss
Profit and Loss A/c of a concern ascertains the net profit or loss at the end of each
accounting year by comparing the totals of incomes, gains and profits on one side and the
expenses and losses on the other. It helps to measure the success or failure of a business
organization in terms of its profit or loss.

ii. Facilitating Tax Assessment
Profit and Loss A/c is prepared in order to ascertain the taxable income. The audited
income statement or profit and loss A/c is recognized by the tax authority. The tax amount
is determined on the basis of the net profit shown by profit and loss A/c. Otherwise, it
becomes difficult to assess the tax, thus, the authority may charge the tax for more than
the actual one. In addition to this, the profit and loss A/c or income statement is legally a
must, for joint stock companies.

140 Aakar’s Office Practice and Accountancy - 10 Final Accounts 141