PROFIT AND LOSS ACCOUNT CONCEPTS:
The initial point in accepting the profit and loss account is to be clear about the
Significance of "profit". Profit is the return for taking risk. Profit has a significant role in assigning resources (land, labour, capital and enterprise). Put basically, falling profits indication that resources should be taken out of that business and put into one more one; increasing profits signal that resources should be stimulated into this business. The major task of accounts, so, is to monitor and measure profits. Profit = Revenues less Costs. So observing profit also means measuring and monitoring revenues and costs. There are two parts to this:-
1) Recording financial data. This is the 'book-keeping' part of accounting.
2) Measuring the result. This is the 'financial' part of accounting. Profits are 'spent' in three ways.
1) Preserved for future growth and investment.
2) Returned to owners, example, a 'dividend'.
3) Paid as tax.