Accounting: Profit and Loss Account

Introduction to Profit and Loss Account

• The Profit and Loss Account is part of the external accounting system and forms the annual financial statement together with the Balance Sheet.
• It enables external stakeholders, such as the tax office and investors, to gain insights into the company's financial situation.

Purpose of Profit and Loss Account

• The primary goal of the Profit and Loss Account is to determine the company's success during the accounting period.
• It helps identify which areas of the business are successful and which are not.

Key Concepts

• Expenses (Aufwendungen) reduce the company's profit, while revenues (Erträge) increase it.
• The goal is to have higher revenues than expenses.

Profit and Loss Account Structure

• The Profit and Loss Account is divided into expense and revenue accounts.
• These accounts are closed on the Profit and Loss Account.

Example: Simple Company

• The company has 4 business transactions, which are divided into expenses and revenues.
• The first two transactions are expenses, which are booked on the expense accounts.
• The first expense is the payment of wages (€50,000), which is booked on the wages account.
• The second expense is the rent payment (€9,000), which is booked on the rent account.
• The last two transactions are revenues, which are booked on the revenue accounts.
• The first revenue is the interest received (€5,000), which is booked on the interest revenue account.
• The second revenue is the sale of finished goods (€200,000), which is booked on the sales revenue account.

Closing the Accounts

• The balances of the expense and revenue accounts are transferred to the Profit and Loss Account.
• The balance of the expense accounts is transferred to the debit side of the Profit and Loss Account.
• The balance of the revenue accounts is transferred to the credit side of the Profit and Loss Account.

Determining the Company's Profit

• The company's profit is determined by comparing the debit and credit sides of the Profit and Loss Account.
• If the credit side is higher, the company has a profit.
• In this example, the company has a profit of €146,000.

Important Notes

• The Profit and Loss Account is closed on the Equity Account.
• A balance on the debit side of the Profit and Loss Account represents a profit, while a balance on the credit side represents a loss.