management Back Forwards
The Profit & Loss account
 

Since companies are set up and operated over an indefinite life time comparisons over time can only be made by dividing the company's activities into arbitrary time periods. For external financial reporting the period is almost invariably a year, although for internal purposes, and interim reporting the periods chosen are often much shorter (arguably contributing to an inappropriately short-term decision emphasis in many companies).

With the need to provide comparable information in successive years in mind, it is necessary to adopt consistent ways to decide which transactions affect one year, and which the next: we must match the transactions to the years. This classification decision is controlled by conventional accounting rules similar to those applied in drawing up the balance sheet (in fact all the accounting rules now interact and affect the presentation of both statements).

 

Matching of revenues and expenses

Matching seeks to relate the revenue earned in one period with all the expenses incurred in earning them.

Accruals and Prepayments

When drawing up the profit and loss account the amount of each expense related to the period must be included, whether or not this amount is the same as that recorded in the books. Often the amounts will be identical but where part of an expense has been incurred (accrued) in the period but the bill has not yet been recorded in the books the full (estimated if necessary) expense for the year is included in the profit and loss account and the unrecorded part (the balance on the account) is carried forward for payment next year.