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Subject: Accounting and Finance

Title : Profit and Loss Account

Accounts

Financial accounts are records of the payments and receipts made by a company in the creation of their profits – or losses.
They are also statements of the assets of the company. Financial accounting uses the distinction between direct costs and indirect costs in order to analyse where costs arise, and hence profitability.
As the distinction between direct and indirect costs implies, costs arise in two ways – either directly through the cost of raw materials and labour involved in the production of a specific unit of output, or indirectly through the administration costs of running the business as a whole. This applies to all businesses, but particularly applies to those businesses that produce more than one product. Here they are sharing the administrative cost of running the whole firm amongst several products. Indirect costs arise in a different way to direct costs, and are treated differently by accountants and businessmen. Success in business means ruthless scrutiny of costs.
Whatever the business, costs must be examined carefully, and kept down wherever possible. The control of expenditure tends to differ according to whether the cost is direct or indirect. For example, direct costs are kept down by making better deals with suppliers of raw materials, and productivity deals with the workforce.
They might be improved by changes in production technique. Indirect costs, however, refer largely to the cost of management, and these are kept down by efficient management.
It is not efficient, for example, to have too much factory space. The cost of this good must be divided in some way between the products, and too much space means that each product is costing more to produce than necessary. Direct costs are also called costs of sales and indirect costs are sometimes called overheads.

Profit and loss
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