Transition from Recording/Classifying to Summarising/Reporting

Profit and Loss Account 

The organisation wants to know not only the (total) quantum of profit (or loss) at the end of the accounting period but also the details of his income and expenses in order to be able to critically analyse them and thereby to develop future plans of action for the benefit of all concerned. The Income Statement, being a summary of all accounts that affect the profit or losses of the firm, accomplishes the purpose. The Trial Balance contains all the (nominal) accounts in the Ledger. From this, all such accounts which result either in gains or in losses and expenses are sorted out and grouped appropriately. Those which contribute to profits are placed on the Credit side of the P & L A/c; and those which decrease the profits are placed on the debit side of the P & L A. /C. If the two sides are individually summed up and the net difference of the totals extracted, the overall profit or loss is identified. Excess on the credit side total indicates profit; and, on the debit side, loss. 

This Income Statement is further divided into two parts : one shows the Gross Profit or Gross Loss; and the other indicates Net Profit or Net Loss. The first is called the Trading A/c and the latter is called the P & L A/c.