Accounting Profit and Loss

What is an accounting profit? Where does it go on the profit and loss sheet? What does it mean for your business?

The answer is - it is the monetary gain made from a business transaction where the income is higher than the expenditure.

If the money received is less than the money spent the result is called a loss.

Accounting Profi
Definition Profit and Los

See how the loss is shown with a negative sign. Another method is showing the numbers in red -$25, or in brackets like this ($25).

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Even though these reports are commonly called 'profit and loss' they do not show a profit at the same time as a loss. It can only be one or the other.

There are two kinds of profit. These are :-

  1. Gross Proft
  2. Net Profit

Gross is the result of deducting the cost of goods sold from the income.

Net is the total after deducting expenses from the gross profit.

Here is a quick example that includes cost of goods sold:-

What is Net Profit

The income on this report includes funds derived from the sale of a service, the sale of a product, or funds from other income such as interest earned on savings at the bank.

The profit and loss statement shows only deductible expenses. Deductible expenses are those expenses that your tax department has approved of and they can be used to reduce the net profit upon which tax payable is calculated. The higher the profit, the higher the tax.

Non deductible expenses are shown on the balance sheet.

Having a loss to avoid paying taxes might sound appealing but at the same time it's not so good for the financial well being of the business.

Take a look at this:-

What is Profit and Loss

If the report shows a gross loss this means there is not enough to cover the overheads and that the following could have occurred:-

  • The mark up on the sales price is too low
  • There are too many discounts being given to customers
  • Not all direct costs have been on-charged to the customer as they should have been

A review of the systems in place will be necessary to correct this problem and save the business from financial trouble.

A profit and loss report can and should be prepared regularly during the financial year for the business owner to analyse, however they won't show expenses such as depreciation of fixed assets which is usually only calculated by an accountant at the end of a financial year. It is inserted underneath the Net Profit and deducted to show the Taxable Profit.

Here are some alternatives to the various terms used:-

Define Net Profit

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Accounting Profit

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