Cash flow statement is prepared to find out the flow of cash over certain period of time and fund flow statement is prepared to find out the reason behind the change financial position of the country of the company between two balance sheets.
Cash flow vs. Fund flow statement
Both statements have some degree of differences because both are based on different accounting principle and assumptions yet both statement plays crucial role to manage and indentify the source of fund.
What is profit and loss account? Write down its importance in a business firm and discuss why and how such statement is prepared.
Profit and loss account
Profit and loss account is a financial statement that summarizes the revenue, cost, and expense of a firm incurred during an accounting period.
It is also known as a income statement that provides reliable information about a business firm ability or inability to generate enough revenue to cover its expenses. It shows the earning capacity of a firm.
It is prepared after the trading account at the end of an accounting period which could be monthly, quarterly or yearly.
Importance of PL Account
To provide information about a business firm’s financial results i.e. net profit or net loss.
To evaluate the performance of a business firm and forecast future perform ace of such firm.
To summarize and classified income and expenses incurred during a specific accounting cycle.
To provide valuable information required by a banker at the time of sanctioning loan and advances.
To assessing risks of not achieving certain level of financial goal in near future.
To provides information regarding the determination of tax obligation.
To generate revenue by reducing unnecessary cost and expenses.
To maintain and create financial discipline and transiency respectively.
Objectives of PL Account
To know the financial result of a business firm at the end of an accounting period.
To provide the information about office and administrative expenses.
To provide the information about various expenses such as selling and distribution, office and administrative and other expenses
To make appropriate decision regarding the financial performance of a firm.
To control unnecessary expenses and cost incurred during an accounting period.
To compare current financial result with previous to analyze a firm’s performance in terms of profit and loss.
To calculate profitability and other financial ratios for several purposes.
To maintain financial discipline and transparency respectively.
Preparation of PL Account
At first trading account should be prepared in order to find out gross profit or loss by subtracting direct cost from the revenue.
In case, NRB has prescribed a separate format then it is mandatory to prepare income statement in such format.
All expenses and losses are recorded on the debit side and all the income and gains are recorded on the credit side of PL Account,
A business firm can chose either Traditional (T) or vertical format to prepare income statement.
While preparing income statement, banks and financial institutions should prepare such statement by using vertical format as mentioned in unified directives no. 4 issued by Nepal Rastra Bank.
Interest income and other financial transactions are recorded on cash and accrual basis respectively.
Income statement is one of the important financial statements to any business firm as it provides relevant information about financial activities of a firm to determine its current and future financial performance.
