The purpose of the income statement is the determination of profits of the business. This statement is also helpful in predicting the future profitability of the concern and the future cash generating ability of the enterprise. This statement reports the change in the owner's capital or the shareholder's equity as a result of operations of the enterprise.
Determination of profit or net income is important in financial accounting. The Accounting Period concept, Realization concept, Matching Concept, and conservatism concept that we have learnt in our earlier chapter help the accountant in determining the income.
It is also called as 'Profit and Loss Account'. It indicates the amount of net income or loss obtained by the company during a particular period. Net income is the excess of revenues over its expenses, and the net loss is the excess of expenses over its revenues. It gives the summarized operating information about the sales, costs, incomes, profits and losses of the company during a particular period. It is the best measure to assess the profitability and performance of the company.
The performance of the company captured in the Profit and Loss Account reveals the relationship between revenue, expenses and Profit/Loss
Income - Expenses = Profit
In the case of Corporate entities, Part II of Schedule VI of the Companies Act 1956 does not prescribe any format for the profit and loss account, but only outlines the information to be included. The Companies Act does not require the preparation of Manufacturing Account or the Trading Account. Only the requirement of Profit and Loss has been specified. Most companies prepare Profit and Loss Account in Vertical Format.
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