Introduction to the profit and loss account

Introduction to the profit and loss account

Richard Bowett introduces the important concept of the profit and loss account:

Introduction - the Meaning of Profit

The starting point in understanding the profit and loss account is to be clear about the meaning of "profit".

Profit is the incentive for business; without profit people wouldn't‘t bother. Profit is the reward for taking risk; generally speaking high risk = high reward (or loss if it goes wrong) and low risk = low reward. People won‘t take risks without reward. All business is risky (some more than others) so no reward means no business. No business means no jobs, no salaries and no goods and services.

This is an important but simple point. It is often forgotten when people complain about excessive profits and rewards, or when there are appeals for more taxes to pay for eg more policemen on the streets.

Accounting Principles:

Principle refers to the fundamental belief (or) a general truth which are established does not change

Accounting concepts

·              Business entity concept

·              Money measurement/Enterprise concepts

·              Going concern/ continuity concept

·              Cost concepts

·              Dual aspects of Concepts

·              A/c ing Period concepts

·              Revenue

·              Expenditure

·              Realization concept or Revenue

·              Objective evidence concept

·              Accrual concept

Accounting conventions

·              Consistency

·              Full disclosure

·              Conservation

·              Materiality