why do we prepare profit and loss account
1. # Profit and loss account is the base of analyzing the performance of company. 2. # We can find net profit or net loss from profit and loss account. This will be useful for taking the decision of payment of dividend. 3. # Employees may demand reward on the basis good performance in profit and loss account. 4. # Bank can take decision for providing more loan to company, if bank sees good net profit in profit and loss account. 5. # Company can fix the accountability, if company suffers net loss in profit and loss account. 6. # Company can take the decision for increasing the prices of product if expenses are showing more what we are expecting in profit and loss account. 7. # Company can calculate different profitability ratio on the basis of items of profit and loss account. 8. # Current year profit and loss account is the base of comparing its figure with past year profit and loss account. 9. # Current year profit and loss account is the base of comparing its figure with other competitor's profit and loss account. 10. # After making profit and loss account, company can create its relationship with company's balance sheet for deep insight.
Company can calculate return on investment, return on total assets and inventory turnover ratio.
Why are Profit and Loss Accounts prepared?
Profit and Loss Account is a period statement which is prepared to show the profit or loss incurred by the Organization in the year for which it is prepared. It is prepared to disclose the result of operations of all the business transactions during a given period of time.
It is also known as profitability statement. It is the final result of all business transactions of the organization. Profit and Loss account has four components namely Manufacturing Account, Trading Account, Profit and Loss Account and Profit and Loss Appropriation Account. Gross profit or Gross loss so calculated in trading account is taken to the profit and loss account.
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