Uses and the importance of the Trading and Profit and Loss Account

• People set up businesses to make a profit
• Profit is the main objective of most privately owned businesses
• However a business may fail to make a profit
• The business may make a loss instead
• The owners of a business will want to know whether they have made a profit or loss at the end of each trading period
• The owners may also wish to know how the profit they have made compares to the profit they wished/expected to make
• They may also wish to compare their profits with those of competitors
• Preparing a Trading and Profit and Loss account helps the business do a lot of things including:
• planning ahead
• obtain loans from lending institutions such as banks or from individuals and other businesses
• tell potential investors how successful the business is
• tell current investors how much profit was made
• tell potential partners how well the business is doing in terms of profit making
• calculate the amount of tax the business has to pay to the government and other authorities

To access more topics go to the Principles of Accounts Notes.