Introduction
Profit and loss account (also called income statement) refers to the financial document that summarizes firm's revenues and expenses and determines the net results (profit or loss) over a period of time. It helps the business firms to know the financial condition and helps to make decisions regarding pricing, budgeting and financial forecasting.
Objectives Of Profit And Loss Account
The main purpose or objectives of preparing profit and loss account can be described as follows:
1. To Know The Trading Result
Profit and loss account provides trading results by ascertaining net profit or net loss of the business.
2. To Check Profitability
Profit and loss account helps to check profitability of the company for the particular period.
Profit and loss account helps to know selling and distribution expenses and office and administrative expenses for the particular period.
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4. To Compare The Results
Profit and loss account helps to compare current year's result (net profit or loss) with the result of previous year.
5. To Control Expenses
Profit and loss account helps to control unnecessary indirect expenses which leads to higher profitability.
6. To Determine Tax Amount
As we know that profit and loss account calculates net profit of the business, that helps to determine company's tax liability for the period.
7. To Facilitate Decision Making
It provides important cost related data that aids the management to make appropriate decisions regarding, pricing, budgeting, controlling, forecasting etc.
8. To Attract New Investors
Profit and loss account provides accurate data and information and shows the financial health of the business. It promotes transparency and helps to build trust. It improves the image and goodwill that attracts new investors.
9. To Pinpoint Inefficiencies
By analyzing the data provided by profit and loss account firm can identify the inefficiencies and areas of improvement. So, it helps to improve the performance of the firm.