The account that shows annual net profit or net loss of a business is called Profit and Loss Account. It is prepared to determine the net profit or net loss of a trader. P&L account is a component of final accounts.
The purpose of preparing the profit and loss account is to ascertain the net income (performance result) of the enterprise for the year/period, which is the most significant information to be reported for decision making. Net income or net profit is calculated by charging all operating expenses and by considering other incomes earned in the form of commission, interest, rent, discount, fees, etc.
In fact, profit and loss account is prepared by following the ‘accrual system of accounting’. where gross profit and other operating incomes are credited and all operating expenses are debited. The resultant effect is either net profit or net loss. If the total amount of gross profit and other operating incomes are more than the operating expenses, the difference is treated as net income or net profit. Alternatively, if the total amount of gross profit and other operating incomes is less than the operating expenses, then the difference is treated as net loss.
Source: https://www.playaccounting.com/explanation/fa-exp/profit-and-loss-account/