Key Management Ratios, 4th Edition

4

Profit and loss account

Introduction

• Working data

A large income is the best recipe for happiness I ever heard of.

JANE AUSTEN (1775–1817)

Introduction

Figure 4.1 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.

Total revenue earned

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