Ascertain your profit and loss with Profit and Loss account
The accounting statement that people most readily understand is the profit and loss account. It is an account, a reckoning up, of whether a business, or an individual departmental unit within a larger business, has made a profit or not. The very straightforward logic is that if all revenues for a given period are added up, that provides the total income earned figure for that period. A parallel totaling process carried out for costs, the various items of expenditure incurred during the same period, gives the total costs figure. Setting the first total against the second is the essence of a business profit and loss account. If total revenues exceed total costs then a profit has been achieved, if costs exceed revenue then a loss has been incurred.
Understanding what a profit and loss is, and what it shows, is not complicated therefore. The issue that often confuses people however, is the question of timing. At what point is it correct for a business to claim to have generated a sale, to have generated revenue. When the customer pays the invoice? When the business originally raised it? The answer is that accounting practice follows the legal position, and if you remember this point then the principle should stick in your mind. Quite simply, a business will recognize a sale as having happened, record it as revenue earned and take credit for it, once there exists a legally blinding obligation upon the customer to pay. That point is generally the point at which the product or service has been successfully delivered, or otherwise provided to the customer’s satisfaction.
