At the end of the financial year, every business firm prepares the final accounts to know its actual financial position. To know the actual earnings of the firm, profit and loss account is prepared.

Profit and loss account shows the total revenues and the total expenditure during the financial year. To determine the net profit of the firm, all the provisions for outstanding expenses are made and the prepaid expenses are reduced from the expenditures of the current financial year. If the revenues are more than the expenditures, in that case there will be net profit. On the opposite of it if the expenditures are more than revenues then it will be net loss.

It means the net profit is the excess of revenue over expenses during a particular accounting period.  Net profit is transferred to the capital account of the proprietor or the partners as the case may be but in case of limited companies, the net profit is transferred to the reserve and surplus account after making the provision for income tax and the dividend etc.

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