Explain the objects of preparing Profit and Loss Account.

Question

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Answer

Profit and Loss Account is prepared with the following objectives:

Determine Net Profit or Net Loss: The main purpose of preparing Profit and Loss Account is to ascertain net profit earned or net loss incurred by the business during the accounting period.
Comparison with the Previous Year's Profit: Profit determined by the Profit and Loss Account for the accounting period can be compared with that of the previous year's profit. It helps in ascertaining whether the business is being conducted efficiently or not.
Finding Details of Indirect Expenses: Indirect expenses are shown in the Profit and Loss Account. These expenses can be compared over the period and suitable steps can be taken for controlling these expenses.
Helps in Preparing Balance Sheet: A Balance Sheet can be prepared only after ascertaining Net Profit or Net Loss through the preparation of Profit and Loss Account.

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Goods worth ₹ 200 purchased from Sohan had been posted to his account as ₹ 250.
A purchase of furniture for ₹ 500 was recorded in the Purchases Book.
Instead of crediting Gian’s Account with ₹ 512, it was debited with ₹ 215.
Goods worth ₹ 130 returned by Gian were entered in the Sales Book and posted therefrom to the credit of Gian’s Personal Account.

Sales of ₹ 20,000 to Manoj were recorded as ₹ 2,000 in the Sales Book.
An amount of ₹ 25,000 spent for the extension of machinery has been debited to the Wages Account.
Discount received from Ram & Co. ₹ 350, has not been entered in the discount column of the Cash Book.
Goods of ₹ 3,000 sold to Mahesh were recorded in the Purchases Book.