Profit and Loss Account

Introduction

A profit and loss account (P&L) is a financial statement that summarizes the revenues, expenses, and profits of an entity over a period of time. It is a measure of the entity’s profitability over that period of time.

The basic structure of a P&L

A P&L has two main parts: revenues and expenses. Revenues are the income that the entity has earned from its operations. Expenses are the costs that the entity has incurred in generating those revenues. Profit is the difference between revenues and expenses.

The format of a P&L

A P&L is typically presented in a vertical format. Revenues are listed at the top of the P&L, and expenses are listed below the revenues. Profit is calculated by subtracting the expenses from the revenues.

Multiple choice questions:

  1. Which of the following is not a revenue?
    • Sales
    • Interest income
    • Dividend income
    • Gain on sale of assets
    • The answer is Gain on sale of assets. Gain on sale of assets is a non-operating revenue, not an operating revenue. Operating revenues are generated from the entity’s core business activities.
  2. Which of the following is not an expense?
    • Cost of goods sold
    • Selling and administrative expenses
    • Depreciation expense
    • Interest expense
    • The answer is Interest expense. Interest expense is a non-operating expense, not an operating expense. Operating expenses are incurred in the ordinary course of the entity’s business.
  3. Which of the following is not a component of profit?
    • Net income
    • Gross profit
    • Net profit after tax
    • Earnings before interest and tax
    • The answer is Gross profit. Gross profit is a subtotal of the P&L, not a component of profit. Profit is calculated after subtracting all expenses from revenues.
  4. What is the purpose of a P&L?
    • To summarize the revenues, expenses, and profits of an entity over a period of time
    • To show how much money the entity has made or lost over a period of time
    • To show how much money the entity owes to others
    • To show how much money the entity is worth
    • The answer is To summarize the revenues, expenses, and profits of an entity over a period of time. A P&L is a measure of the entity’s profitability over that period of time.