The profit and loss account provides a measure of performance that can be challenged on certain grounds. The following limitations of profit and loss account are worth noting:

1. Profit and loss account is prepared for a certain period and hence it is an interim statement. In an absolute sense, the true profit or loss can be ascertained only after the concern has run its entire life - a point at which all the inputs to the business from its start up to its final liquidation can be ascertained and can arrive at the precise profit for its whole life. But since this is not possible, the profit and loss account is prepared at regular intervals by estimating what proportion of the life profit of the company has been earned in a particular period. In order to arrive at this estimate, the accountant has to make many assumptions about the future of the company and the uncertainties that surround it.

2. The profit as disclosed by the profit and loss account is not absolute but is relative as the P&L account is based upon various accounting conventions and concepts, and depends upon correct recognition of revenue and calculation of expired costs.

   Example: The deviation in arriving at correct provision required for doubtful debts may disturb the profits.

1. The profit and loss account does not disclose the effect of non-financial items like efficiency of the management, loyalty of the workforce, quality of the product, etc.

2. Net profits are ascertained on the basis of historical costs. Unless accounting adjustments are made for the inflationary trends, the profit disclosed by the profit and loss account may not be the correct one.

3. The profit and loss account is prepared on accrual system of accounting which provides a better measure of performance, but includes a number of non-cash items in its arrival at the figure of net profit. For example, depreciation expense is an allocation of cost that has no associated cash outflow, yet it decreases net income.              

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