All reports, statements, etc. prepared in business have some objectives because no work in business is done without an objective. A business becomes successful only when it knows its objective because business activities are managed according to the objective. The same rule also applies to business reports, statements, etc. Different data can be used in each of the reports, statements, etc.
Profit and Loss Account is prepared after preparing Trading Account as it requires gross profit or loss. Profit and Loss Account is prepared to calculate profit or loss in business. Profit and Loss Account is prepared only when the business is involved in trading activities. Trading Account records trading transactions and Profit and Loss Account records transactions that support trading activities.
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Objectives of Profit and Loss Account
Following are the objectives of profit and loss account:
1. Net Profit and Loss:
The main objective of Profit and Loss Account is to calculate the profit or loss of a business over a certain period. Net profit and loss is the actual profit or loss of the business as it is determined after adding and deducting all direct-indirect income and expenses. Only the result of Profit and Loss Account shows whether there is profit or loss in the business. To calculate net profit and loss, all indirect income is recorded on the credit side and all indirect expenses are recorded on the debit side, then both the sides are added, if the debit side is higher, it is called net loss and if the credit side is higher, it is called net profit.
2. Indirect Income and Expenses:
By preparing profit and loss account all the indirect income and expenses can be seen together with the help of which indirect income and expenses can be managed, hence this is also an objective of profit and loss account. Since all related indirect income and expenses are recorded together in the profit and loss account, it becomes easier to understand where the income is coming from and where the expenses are occurring. Using this data, income can be increased, and expenses can be reduced, or decisions related to these can be taken.
3. Helps in Decision Making:
Helping the management in taking decisions is also an objective of profit and loss account because without data the management is not able to take appropriate decisions. With its help, management can take appropriate decisions by analyzing the data. Trading account shows data of trading activities only and profit and loss account show data of transactions supporting trading activities. All relevant reports are needed to make a good decision.
4. Price Strategy:
Helping the management in adopting an appropriate pricing strategy for goods and services is also an objective of the profit and loss account. Adopting an appropriate pricing strategy is very important because without adopting it it can lead to unexpected results which can create trouble for the business. Appropriate pricing strategy also impacts whether a business will be profitable or not. Note that a single report or statement may not be helpful in adopting an appropriate pricing strategy, this requires all related reports or statements.
5. Attract External Resources:
Attracting external resources is also an objective of the profit and loss account because external resources help in the growth of the business. External resources include investors, creditors, business opportunities, etc. Profit and loss account provides data of financial performance, profit and loss, etc. with the help of which external sources can be attracted. Note that businesses prepare false profit and loss accounts to attract external resources, doing so is a legal offence.
6. Tax Calculation:
Profit and loss account helps in calculating tax as it provides data of net profit and loss. If the business falls under the tax category, the business is liable to pay tax accordingly, if the business does not fall under the tax category, the business is not liable to pay tax. How much tax will be applicable on business depends entirely on the tax category determined by the governing authority.
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QNA/FAQ
Q1. Does profit and loss account help in adopting an appropriate pricing strategy?
Ans: Yes, profit and loss account help in adopting an appropriate pricing strategy as it provides data of indirect income and expenses, but other reports are also required.
Q2. Does profit and loss account calculate profit or loss?
Ans: Yes, profit and loss account calculate net profit or loss with the help of gross profit or loss and indirect expenses and income.
Q3. Does profit and loss account help in calculating tax?
Ans: Yes, profit and loss account help in calculating tax as it provides the net profit or loss in the financial period.
Q4. Does the profit and loss account reflect the financial performance of the business?
Ans: Yes, profit and loss account reflects the financial performance of the business as it provides profit and loss data, but it also requires other reports.
Q5. Write the objective of profit and loss account.
Ans: Following are the objectives of profit and loss account:
1. The objective of the profit and loss account is to calculate net profit and loss.
2. The objective of the profit and loss account is to show indirect income and expenditure at one place.
3. The objective of the profit and loss account is to help in decision-making.
4. The objective of the profit and loss account is to help in adopting an appropriate pricing strategy.
5. The objective of the profit and loss account is to attract external resources.
6. The objective of the profit and loss account is to help in calculating tax.
7. The objective of the profit and loss account is to help provide data for comparison.
8. The objective of the profit and loss account is to help provide data for analyzing.
