Profit & loss - part 2

Understand the Profit Equation

Unit 5

In order to allow a manager to understand how things are going and how the business is performing, the Profit Equation is expanded into a Profit and Loss statement presenting the situation in a lot more detail.

Commonly sales income and expenditure information is recorded in an accounting system into accounts. Each account representing the nature of the income or expenditure. So for example Sales income will be recorded into a sales account and perhaps the expenditure on say renting a building would be recorded into a rent paid account.

The diagram below demonstrates how a usual profit and loss statement is built up.

unit-05

An important point is that a profit and loss statement will refer to a period of time over which the sales and expenses transactions have occurred. This needs to be shown when a statement is prepared so that a reader understands what the figures refer to.



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