25 Need-To-Know Management Ratios

3

The profit and loss account

This chapter will show you:

• How we recognise revenue and costs
• The distinction between profit and cash flow

Introduction

Figure 3.1 identifies where the profit and loss account fits into the set of accounts. It is a link or bridge between the opening and closing balance sheets of an accounting period. Its function is to identify the total revenue earned and the total costs incurred over that period. The difference between these two values is the operating profit. It is, therefore, a document that relates to a very precise time period. There are many accounting rules to do with the identification of revenue and costs.

Revenue

Total revenue earned is generally the amount invoiced and, in most situations, there is ...