The Differences Between Income Statements and Profit and Loss Accounts

Accounting can be difficult to maintain in any size business. Federal, state and local governments all require complete records of businesses to be kept in order to pay taxes and to keep an accurate record of profits and losses. Individuals tend to confuse income statements and profit and loss accounts. The terms are used interchangeably in the United States, but have some slight differences.

Income statements show how much money a business has made over a specific period of time. This time period is usually a year or less. The income statement also includes a detailed description of the expenses paid over that specific period of time. This allows the business to see how much money was earned after expenses. Income statements are also used to show shareholders how much money they would make for that specific period of time.

Profit and loss accounts are special accounts that show all expenses and only the gross profit for a company. Once this numbers are calculated, they will show the company's profit for a year. This number should be the same as the number shown in the income statement. The owners of the company can then use the profit number to disburse money to equity shareholders of the company.

Many businesses interchangeably use the terms income statement and profit and loss accounts. They have many similarities. Both are accounting terms that use a company's income and expenses to determine profits. Both are used for a specific period of time, usually a year or less. They are both used to determine the net profit of a company in order for equity shareholders to receive their salary at the end of a specific period.

There are also a few differences between income statements and profit and loss accounts. Profit and loss accounts only show the gross profit of a company whereas income statements show the net profit of a company. Income statements are used to show the net worth of a company at a specific period of time. Profit and loss accounts are used to determine what each individual equity shareholder is entitled to as a profit from the company at a specific period of time.