Income Statement vs
Profit and Loss Account

by Shai
(India)

Q: What is the difference between the income statement and the profit and loss account?

A: The income statement is a statement (a report) which forms part of all the financial reports, called the financial statements.

The profit and loss account ("account" not "statement") is one of the T-accounts. But this profit and loss T-account is a special kind of T-account with a special role.

You see, the profit and loss account is really only opened at the end of the year. The rest of the year it has a zero balance (in other words, it virtually does not exist). It is used right at the end of the year to calculate the profit or loss for the year.

The balance of the profit and loss account at the end of the year represents the net profit or loss for that year - which is the same figure we show as the net profit or loss in the income statement (in the profit and loss account above, this comes to $80,000).

At the end of each year this balance is then transferred to owners equity, as profits or losses belong to the owner. The specific name of the owner's equity account this goes to is retained earnings (also known as "accumulated profits").

For a business that sells products, the net profit or loss in the profit and loss T-account (the balance of the account) is calculated by transferring the gross profit from another account called the trading account and then transferring all other business expenses into this profit or loss account too (expenses such as salaries and wages, insurance, rent, etc.). This then gives a balance which represents the net profit or loss for the year.

The profit and loss statement ("statement" not "account") is the same as the income statement - it's another term for the same report (click the link here for an example and full lesson on the income statement / profit and loss statement).

Hope that makes sense and that you now understand the difference between these accounting terms!

All the best in your studies!

Best,
Michael Celender


Related tutorials:

• T Accounts
• Accounting Reports
• The Income Statement
• Sales, Cost of Goods Sold and Gross Profit

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