the profit and loss account in accounting?

Question

Rudy a client who has traded as a computer hardware for the last two years, has told you that he finds difficulty in understanding the draft profit and loss account for the year ended 31 dec 2005.The account show a profit but the bank still overdraft .Why ? What reasons ?.Write a report format with your response .

Answer 1

This sounds like a homework problem from an accounting class, so I won't tell you the answer, but just think about the time difference resulting due to the different accounting methods used. When are items of rev/exp recognized for books and when for bank purposes. (One should be accural and the other cash).

Answer 2

The missing report that Rudy needs is the cashflow statement. It will show him the net effects of all of the transactions on the Cash account. If the P&L statement shows a profit and Cash in bank is overdraft, here are some of the reasons:

1) On Dec 31, Cash collections from the customers were advised to Rudy but was not received by the bank until later.

2) Rudy's failure to recognize expense from a prepaid expense account.

3) Unrecorded but paid expenses as of Dec 31.

Answer 3

If the bank is overdraft, there should be cashflow problems. Most probably his customers are not paying him on time.

If the P&L is showing a profit, it could mean that there are a lot of sales on credit (if the account receivable is large and this links to the poor cash inflow). Others may include an understatement of expenses or an overstatement of revenue.

Answer 4

Profit and Loss Statement - P&L

A financial statement that summarizes the revenues, costs and expenses incurred during a specific period of time - usually a fiscal quarter or year. These records provide information that shows the ability of a company to generate profit by increasing revenue and reducing costs. The P&L statement is also known as a "statement of profit and loss", an "income statement" or an "income and expense statement".

Investopedia Says: The statement of profit and loss follows a general format that begins with an entry for revenue and subtracts from revenue the costs of running the business, including cost of goods sold, operating expenses, tax expense and interest expense. The bottom line (literally and figuratively) is net income (profit).

The balance sheet, income statement and statement of cash flows are the most important financial statements produced by a company. While each is important in its own right, they are meant to be analyzed together.

Answer 5

One of these options should give you the answer:
1) check your account again and see if you have misstated any item

2) If everything is right, do a Bank reconciliation statement, you may have recorded a payment by cheque as received but your bank wouldnt have credited the amount to your account yet or the cheque would have bounced

Answer 6

Those always happen in accounting. Because, loss/profit recorded in accrual method that allowed recognition of profit without cash received ...

Answer 7

Hi Maysoe,

Wow, that sounds just like one of the assignment exercises I had years ago in college.

Good Luck,
~Trey

Answer 8

well its not balanced