Which financial statement is prepared to calculate the net profit?

Which financial statement is prepared to calculate the net profit?

• A. The balance sheet
• B. The profit and loss account
• C. The trading account
• D. Liquidity

Answer: (B)

Net profit is calculated in the profit and loss account, which records all income and expenses over a period. By subtracting total expenses (including cost of sales, operating costs, interest, and taxes) from total revenues, you arrive at the net profit (the bottom line) for that period. This statement, often called the income statement, specifically shows profitability after all costs have been accounted for. The balance sheet shows what the business owns and owes at a single point in time, not the profit earned over a period. A trading account focuses on gross profit from trading activities, before all other expenses. Liquidity relates to how readily assets can be converted to cash. So, the profit and loss account is the one prepared to calculate net profit.

Net profit is calculated in the profit and loss account, which records all income and expenses over a period. By subtracting total expenses (including cost of sales, operating costs, interest, and taxes) from total revenues, you arrive at the net profit (the bottom line) for that period. This statement, often called the income statement, specifically shows profitability after all costs have been accounted for. The balance sheet shows what the business owns and owes at a single point in time, not the profit earned over a period. A trading account focuses on gross profit from trading activities, before all other expenses. Liquidity relates to how readily assets can be converted to cash. So, the profit and loss account is the one prepared to calculate net profit.