1. The purpose of the Profit and Loss Account
The Profit and Loss Account is intended to show the final surplus available for appropriation, i.e. either for distribution to the proprietors or allocation to a reserve account.

The account must therefoore contain all the remaining expenditure incurred over the period covered other than that which has been charged to the Manufacturing and Trading Accounts. Since the later accounts normally show expenditure which varies in some relation to output and sales, the costs which appear in the Profit and Loss Account comprise administrative costs of the organisation.

Exceptional costs which do not form part of the normal overheads of the business are also shown in the Profit and Loss Account, and it is clearly desirable that such costs should be separated from those which are recurrent. Examples of such costs not strictly applicable to the normal operations of the business are: losses on exchange, losses on the sale of investments or fixed assets and damages payable in legal actions.

The costs which are shown in a Profit and Loss Account should be grouped, with sub-totals, under rational headings so that the trends shown by a succession of accounts may be followed more easily.
Income or sales from trading normally appear in the Trading Account, but most businesses receive miscellaneous income, such as interest on invesments, profit on sales of capital assets, credits attributable to the operations of a prior period are otherwise not directly attributable to current trading operations.
Taxation has been regarded for many years as an appropriation of proofit, and as such is properly entered in the Appropriation Account, and not in the Profit and Loss Account, which is prepared for the purpose of showing the profit available for appropriation.
The relation between profit as interpreted for tax purposes and profit arrived at by the application of normal accounting principles is, however, nowadays often obscure. The tax provision made in the Profit and Loss Account will represent an estimate of the tax payable on the profits of the period and will be credited to a Tax account.
The Appropriation Account for accounting purposes may be considered as a capital account, since the balance forms part of the variable capital of the business and is included amongst the other liability balances in the Balance Sheet.

2. Profit and loss under the Companies Act
So far as limited companies are concerned, certain items of specific information are required to be shown in the Profit and Loss Account in conformity with the provisions of the Companies Acts 1948 and 1967. Some of the items required, such as auditor’s fees, are often insignificant compared with the other outgoings of a company. Furthermore, there is an undoubted tendency for many companies, no doubt for good reasons, to regard the provisions of the Companies Acts as the maximum rather than the minimum information to be shown, with the result that the Profit and Loss Accounts prepared for publication are of limited use to the management either in measuring the efficiency of an undertaking or in controlling its affairs. In short, the final accounts prepared for internal uses are in many respects much more informative than those prepared in accordance with the Companies Acts or similar legislation applicable to other corporate bodies.

3. The Appropriation Accounts
The Appropriation Account is often treated as part of the Profit and Loss Account, although it serves the distinct purpose of showing how the profit or loss resulting from the operations of the period has been allocated. It is best, therefore, treated as a separate account to which will be transferred the balance of final profit obtained from the Profit and Loss Account.
The allocations or appropriation of profit normally shown in this account may be divided into the following four headings: (a) appropriations free for withdrawal by the proprietors, e.g. allocations to the drawings or current accounts of partners, and allocations to the dividend accounts of shareholders; (b) allocations to revenue reserves for strengthening the capital. Examples would be reserves for research and development, dividend equalisation reserves, reserves for possible losses on exchange. Revenue reserves may, even if not specifically earmarked for such a purpose, be distributed as dividends or other shares of profit to the proprietors; (c) capital reserves, i.e. those which may not be distributed to the proprietors, except on a winding-up of the business. Allocations are made to capital reserves from share premiums, capital profits and surpluses on the revaluation of fixed assets; (d) the balance carried forward to the next period of account. Such a balance is more strictly a revenue reserve available for distribution to the proprietors or other allocation at the end of the next period of account.

The administrative expenses shown in the Profit and Loss Account would include salaries and expenses of administrative staff, executives and directors, and costs of space, building services, professional fees, depreciation, postage, stationery and other expenses not already charged in the Manufacturing or Trading Accounts.