Profit and Loss Account

A detailed Summary of Profit and Loss Account

The Profit and Loss account does exactly what it suggests it shows the profit or loss that a business has made over a period of time, usually six months or one year, this is called the accounting period. Once prepared the profit and lose account can be used by a number of interested parties in a number of ways, it can be compared to a previous profit and loss account to see how the business is fairing. Other interested parties are potential investors, current investors, shareholders, management, company accountants and inland revenue.

In order for the profit and loss account to make any sense to interested parties who rely on them for decision making purposes there has to be consistency in the way the items are treated without this it would be impossible to use them to compare business performance. These rules are called the Accounting Standards and are set out as the 'Statement of Standard Accounting Practice' (SSAP) and recently as 'Financial Reporting Standards' (FRS). Together these statements bring about consistency for the reliability of the financial results that they report on.

Without these standards being set out it would be very difficult to regulate the profit and loss account. For example how stock is valued wh

A profit and loss account for one company can be drawn up using different methods and produce different outcomes which would then be reflected in the balance sheet. Depending on who was interested in the company figures this could produce a very different picture. The Accounting Standards go some way to monitoring how the accounts are drawn up but the biggest problem interrupting accounts is there is nothing illegal in businesses using to their best advantage accounting rules which are drafted to allow accountants a high degree of flexibility.

Last In First Out (LIFO) this adopts the latest prices and these are then used to charge the issue of goods to the production. Production is charged with costs that are close to current economic values and there are no balancing adjustments to be written off to the profit and loss account but at the same time the closing stock is valued at much older prices and may not bear any relevance to current market prices. This method is not acceptable for British tax purposes because it takes the profit down and therefore a company would pay less tax.

Periodic Weighted Average involves calculating an average issue price based on all the prices paid for materials purchased during a particular period of time. These goods are then charged at the average price. This method is simple to calculate, the issue price relates both quantities purchased and charging prices, its accurate because the price cannot be calculated until the time period has elapsed, it provides a compromise between the lowest and the highest price paid and its not distorted by quantity. Its does have draw backs the price cannot be calculated till the time period is over, prices from no previous periods are ignored, it may bear

Some common words found in the essay are:
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Approximate Pages = 5 (250 words per page double spaced)

Category: Miscellaneous