PROFIT AND LOSS ACCOUNT - accounting

Profit and Loss account or Income Statement

Profit and loss account or also known as the income statement is one of the major financial statements (others include: balance sheet, the cash flow statement, the statement of stockholder’s equity).
Profit and loss account shows the profitability of a company in a given period of time.
There are certain elements in the P&L which refer to revenues or gains from a certain type of activity or expenses and losses:

1. Revenues and Gains

1. From operating activity (core activity)
2. Investing activity
3. Financial activity

1. Expenses and losses

1. From operating activity
2. Investing activity
3. Financial activity

There are two formats to prepare the P&L:

1. Single-step – which uses this formula to arrive at net income: Net income = (Revenues + Gains) – (Expenses and Losses)
2. Multiple-step  - which segregates the operating revenues and operating expenses from the non-operating revenues and expenses. It shows the gross profit (net sales minus the cost of goods sold).

 
Take this short quiz to check what you already know:

1. Amounts earned by a company in its main operating activities are:  a. Revenues 
​b.  Gains

2. A company sells a car that is no longer used in its business. The amount received is more than the book value of the asset. The company will report a(an):  
a. Expense
b. Gain
c. Loss
d. Revenue 

3. Is a company’s Interest Expense:
a. an operating expense or
b. a non-operating expense?

4. Net Sales minus the Cost of Goods Sold (COGS) equals:
a. Gross profit
b. Net income

5. Gross profit minus Operating expenses  is also known as:
a. Net income
b. Operating income

Now check your answers below.

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Key: 1. a/ 2 b /  3 b/  4 a/ 5 b

Glossary:
Profit and loss account (P&L) or Income Statement – Rachunek Zysków I Strat
Profitability – rentowność
Revenues – przychody
Gains – zyski finansowe
Expenses – wydatki
Losses – straty
Operating activity – działalność operacyjna
Investing activity – działalność inwestycyjna
Financial activity – działalność finansowa
Single-step – format uproszczony
Multiple-step – format kalkulacyjny
Net income – przychody netto
Cost of goods sold – koszt sprzedanych towarów
Book value – wartość księgowa
Interest - odsetki