Profit and Loss Account
The profit and loss account is a financial statement which represents the revenue that the business has received over a given period of time, and the corresponding expenses which have been paid.
It also shows the profit that the business has made over a period of time (usually 12 months) and the uses to which the profits have been put.
Revenue
Revenue is the inflow of money to the business in the course of the ordinary activities of the enterprise.
There are a number of different sources of revenue;
- cash sales
- credit sales (i.e. where the business has sold goods to customers, but has not yet received the cash)
- interest
- royalties
- dividends that the business receives on its investments or
- fees for hiring-out the resources of the business to a third party.
Revenue is recognised at either the receipt of the cash OR at the point of sale (if the goods are sold on credit).
Expenses
Expenses are expired costs (i.e. costs from which all benefits have been extracted during an accounting period). Examples include wages, raw materials, and utility bills – often known as revenue expenditure.
It must be remembered that expenses are not necessarily the same as costs.
For example, if a business purchases a new fixed asset (such as a machine) then it will clearly incur the monetary cost of purchasing the machine (say £50,000).
However, this £50,000 will not be written-off as an expense, since the benefits from the machine will last for more than a single accounting period (i.e. for more than 12 months). Instead of writing-off the total cost of the machine, a portion of the £50,000 will be written-off as an expense each year over the useful life of the machine – this is known as a ‘depreciation charge’.