What Accounts Makeup the Profit/Loss Statement?

The performance of a firm with a robust growth in profitability is reported in the profit and loss account.

At the end of each fiscal year, managers and business owners sit back and assess the performance of their business. This is done using financial statements, like the statement of changes in financial position, statement of cash flows, statement of changes in owner's equity and the profit and loss statement. The profit and loss statement, also known as the income statement, is a financial statement that indicates the results of earning activities for a definite time period, such as a year, a month or a quarter.

Sales Account

The sales or revenues account tracks the increases in owner's equity from the sale of goods or performance of services. Sales are measured by the amount of cash or other assets received. Although sales often consist of cash, it may contain any asset received, such as customer's promise to pay in the future (such as an account receivable or the receipt of property from the customer). A sale is recorded in the sales account as a credit, while the asset received in exchange is recorded as a debit to the cash account or account receivable account.

Cost of Goods Sold Account

This account shows the total cost of the inventory that was sold during the period. The cost of goods sold is subtracted from sales to arrive at an intermediate income amount, called gross profit or gross margin on sales. The gross profit is calculated to show the amount of markup on the cost of goods sold during the period. The cost of goods purchased is recorded as a debit to the purchases account and a credit to the cash or liability account. Once these goods are sold, a credit is added to the purchases account and a debit added to the cost of goods sold.

Selling and Administrative Expenses

Selling expenses result from efforts to sell the inventory and include storage costs, advertising, sales salaries and commissions, and the cost of delivering the goods to customers. Administrative expenses are management costs associated with the general administration of the company's operations. They include costs of operating general office, accounting, personnel, and credit and collection departments. All these costs are debited to the selling and administrative expenses account, while the cash or liability account is credited.

Other Expenses

Abnormal expenses which are not a frequent part of business operations are debited to the other expenses account. Such expenses include losses on disposal of equipment or assets, and foreign exchange losses. The purpose of this account is to inform users of the profit and loss statement that such expenses don't occur often, and hence the users should not place a lot of weight on them in evaluating the firm's performance.

References

• Ohio State University; The Profit and Loss Statement: What Does It Mean; Marianne M. Huey
• University of California at Los Angeles: How to Review & Understand the Revenue Account & the Accounts Receivable Report: June 12, 2009
• "Principles of Accounting, 2nd Edition"; Leroy F. Imdieke, et al; 1986
• "Financial Accounting, 5th Edition"; Paul B. W. Miller, et al.; 1992
• "Fundamental Accounting Principles, 11th Edition"; William W. Pyle, et al.; 1988