16. Profit and loss account (income statement)

The accounting report that summarizes the revenues and the expenses of the accounting period is called the income statement (or the profit and loss statement, statement of earnings, or statement of operations). Income statement may be examined in terms of basic concepts as well, because income is normally measured and reported in accordance with (GAAP underlay by a set of concepts which provides conceptual criteria to help resolve this accounting problem. For example, the measurement of income most often (to base) un what is called accrual accounting, central to which are realization concept and matching concept.

The profit and loss account summarizes the profitability of the company by balancing revenue against expenses.

Revenue (sometimes called turnover) represents any increase in the owner's equity resulting from the operation of the business. Expenses are costs incurring in connection with the earning of revenue.

In the P&L account below, the direct costs, or cost of sales deducted from the turnover to reach a gross profit. The operating profit is reached by deducting other operating expenses, sometimes called fixed costs to reach an operating profit. On some statements, especially consolidated accounts, minority interests will be deducted from this sum.

The profit figure now reached is taxable at whatever rate of corporation tax is applicable. The rest sum can be distributed between shareholders and retensions to the reserves. In this case there are a small number of preference shareholders who received a fixed dividend and a dividends to the ordinary shareholders. After this the company retains earnings

17. Managerial accounting.

The accounting information specifically prepared to aid managers is called managerial (management} accounting information. Managerial accounting information is used in three management functions:

a) planning

b) implementation

c) control.

Planning. Performed by managers at all levels, in all organizations, planning is the process of deciding what actions should be taken in the future. An important form of planning is called budgeting.

Budgeting is the process of planning the overall activity of the organization for a specified period of time, usually a year. Planning involves making decisions. Decisions are arrived at by recognizing that a problem exists, identifying alternative ways of solving the problem, analyzing the consequences of each alternative, and comparing these consequences so as to decide which is best Accounting information is especially useful in the analysis step of the decision-making process.

Implementation. Each manager must also make more detailed implementation plans than are encompassed in the approved budget; specific actions to be taken on a week-to-week and even day-to-day basis must be planned in advance. Although much of this activity is routine, the manager also must react to unanticipated events, changing previous plans as necessary to adjust for the new conditions.

Control. The process the managers use to assure that the employees perform properly is called control. Accounting information is used in the control process as a means of communication, motivation, attention-getting, and appraisal.

As a means of communication, accounting reports can assist in informing employees about management's plans and policies and in general about the types of action management wishes the organization to take. As a means of motivation, accounting reports can induce members of the organization to act in a way that is consistent with the organization's overall goals and objectives. As a means of attention-getting, accounting information signals that problems may exist that require investigation and possibly action; this process is called feedback As a means of appraisal, accounting helps show how well members of the organization have performed and thus provides a basis for a salary increase, promotion, reassignment, corrective action of various kinds, or (in extreme cases) dismissal.

Financial accounting information is intended both for managers and for the use of parties external to the organization, including shareholders (and trustees in nonprofit organizations), bankers and other creditors, government agencies, and the general public. Shareholders who have furnished capital to a company want information on how well the company is doing. If they decide to sell their shares, they need information that helps them judge how much their investment is worth. Prospective buyers of these shares need similar information. If the company wants to borrow money, the bank or other lender wants information that will show that the company is sound and that there is a high probability that the loan will be repaid when it falls due.