The profit and loss (P&L) statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period, usually a fiscal quarter or year. The P&L statement is synonymous with the income statement. These records provide information about a company's ability or inability to generate profit by increasing revenue, reducing costs or both. Some refer to the P&L statement as a statement of profit and loss, income statement, statement of operations, statement of financial results or income, earnings statement or expense statement.
The P&L statement is one of three financial statements every public company issues quarterly and annually, along with the balance sheet and the cash flow statement. It is often the most popular and common financial statement in a business plan as it quickly shows how much profit or loss was generated by a business. shows how much profit or loss was generated by a business.
The income statement, like the cash flow statement, shows changes in accounts over a set period. The balance sheet, on the other hand, is a snapshot, showing what the company owns and owes at a single moment. It is important to compare the income statement with the cash flow statement since, under the accrual method of accounting; a company can log revenues and expenses before cash changes hands.
The income statement follows a general form as seen in the example below. It begins with an entry for revenue, known as the top line, and subtracts the costs of doing business, including the cost of goods sold, operating expenses, tax expenses, and interest expenses. The difference, known as the bottom line, is net income, also referred to as profit or earnings. You can find many templates for creating a personal or business P&L statement online for free.
It is important to compare income statements from different accounting periods, as the changes in revenues, operating costs, research, and development spending and net earnings over time are more meaningful than the numbers themselves. For example, a company's revenues may grow, but its expenses might grow at a faster rate.
Main benefits or advantages of profit and loss account can be expressed as follows:
Helps to Track Net Profit or Net Loss : One of the major benefits of preparing a profit and loss account is to track business performance in terms of net profit or a net loss. Net profit or net loss for a certain period can be obtained with the help of a profit and loss account.
Helps to Track Indirect Expenses : Indirect expenses of the business of a particular accounting period can be tracked and measured with the help of information provided in the profit and loss account.
Helps to Determine the Net Profit Ratio : Profit and loss account determines the net profit of the business for a particular period. So, it helps to obtain the net profit ratio (ratio between net profit and sales). It can be determined by using the following formula :
Net Profit Ratio = Net Profit / Net Sales
Helps To Control Indirect Expenses : The profit and loss account provides data regarding the different indirect expenses of the business firm. It helps to control and minimize excess expenses to improve the profitability of the firm.
Helps in Decision Making : Profit and loss account provides detailed information about, net profit, net loss and indirect expenses of the business which helps to compare the current profitability position with the profitability position of the previous period. So, it helps to predict future performance, makes plans and makes better decisions.
It consists of two main categories: "revenue and gains" and "expenses and losses." By subtracting the expenses and losses from the revenues and gains, you have one indicator of a company's financial health during the period in question.
Within the "revenue and gains" category, the first figure needed to complete a profit and loss statement is the amount of revenue the company generated during the period in question. For a retailer or manufacturer, for example, primary revenues may be the income generated from sales of the product or service. A revenue figure is a raw number, meaning it reflects total sales without regard to any expenses incurred as part of the sale. Secondary revenues may also apply in the event the business earned income by interest on cash in the bank or rents. Secondary revenue includes income earned from activities apart from selling services or merchandise.
Gains made by the company during the period in question are also reported under the "revenue and gains" section of the profit-and-loss statement. A gain occurs when the company sells an asset for more than the book value. When a company wins a lawsuit and receives a monetary settlement, this can also be considered again.
Expenses are part of the second category, "expenses and losses," on a profit-and-loss statement. Expenses include anything involved in the cost of selling the service or product. Within the expense category, you will typically find the cost of goods sold, supplies and equipment, wages and commissions and other direct costs of selling the product or service. Common expenses that fall within these subcategories include office supplies, office or equipment rental payments, goods purchased to produce the product, along with employee salaries or wages.
Losses make up the other half of the "expenses and losses" category on a profit-and-loss statement. Losses can be thought of as the converse of gains. If a company sells an asset for less than the book value, the deficit is reported as a loss. Likewise, if a company loses a lawsuit and is required to pay out a monetary judgment, then the judgment amount is reported on the profit-and-loss statement as a loss.
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