What is a requirement for a profit and loss account?

Question

Options

• AThe balance has to be carried forward from one fiscal year to the next fiscal year.
• BIt must be set as a cash account.
• CThe balance has to be cleared at the end of each fiscal year.
• DIt must be located in the first three drawers of the chart of accounts.

• A
  3% (1)
• B
  3% (1)
• C
  93% (28)

Explanation

A profit and loss (P&L) account must have its balance cleared (closed) at the end of each fiscal year because it tracks income and expenses for a single period only - carrying a balance forward would contaminate the next period's results, making it impossible to measure performance accurately.

Why the distractors are wrong:

• A is wrong because carrying balances forward is what balance sheet accounts (assets, liabilities, equity) do - not P&L accounts.
• B is wrong because P&L accounts are not cash accounts; they record revenues and expenses regardless of whether cash has moved.
• D is wrong because there is no rule tying P&L accounts to a specific position ("drawer") in the chart of accounts - that detail is fictional.

Memory tip: Think of P&L as a whiteboard that gets erased every year - at year-end, the net result flows into retained earnings on the balance sheet, and the board resets to zero for the new fiscal year.

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