ABSTRACT
This chapter traces the birth and the growth of the Profit and Loss account, the second financial statement that follows the balance sheet. The Profit and Loss account is of more recent origin. It emerged only in the second half of the nineteenth century. Till the advent of the public utility companies with monopoly of service, profit was the surplus of assets at. the end of the period over the initial investment at the beginning of the period. For ascertaining profit under this method, balance sheet was more than adequate. However with public utility monopolies, there was a need to regulate pricing of services. This need translated to measuring profit as the residue of revenue after removing the costs. With the residue method of computing profits, profit and loss account gained in importance. Over the years, the length of transaction cycles increased and the period for which results were reported decreased. This resulted in the accrual system, of accounting that reflected profits accurately for shorter periods. However, with accrual system, the need for judgment in computing profits increased. Misuse of this discretion in computing profits resulted in the need for accounting standards. With accounting standards, two schools of thought emerged, the principle-based accounting standards and the rule-based accounting standards. As the importance of profit and. loss account increased, mandate for additional disclosures were legislated. Side by side with mandate, voluntary disclosure of information in the profit and loss account also increased, as management sought to gain investors' confidence. In a very short period of time, the profit and loss account gained importance equal to that of the balance sheet if not more.
