What is a Profit and Loss Account?
A profit and loss account is a way of summarizing a company's trading and is an alternative to the balance sheet. The main purpose of the accounts is the management of the business in order to have a clear picture of the financial condition and for strategic planning.
What is Profit?
Profit refers to sales revenue less direct costs and overheads (i.e. rent, utilities, insurance, office supplies) It is a financial gain resulting from a transaction or an event that adds value to the business of the trader in terms of future cash-flows.
What is Loss?
Loss refers to the opposite of profit and it occurs when costs exceed revenue. It can be caused by wrong pricing decisions, ineffective marketing strategies, or loss-making products.
How to structure P&L statement
The typical time frame for a PL statement is over a set period, either monthly, quarterly, or fiscal year. This profit and loss p is produced by the companies accountant. The main categories found in a statement are:
Table of contents
- Total revenue
- Cost of Goods Sold (CoGS)
- Selling, General, and administrative (SG&A)
- Technology research and development
- Marketing and advertising
- Taxes
- Expenses
- Net income
In doing a cash flow statement you can comfortably and quickly check the company's financial health.
Profit and Loss Statement
The profit and loss statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period. During a specified time frame (usually one quarter or one year), it provides information about profit and loss for an organization.
These records provide information about a company's ability or inability to generate profit by increasing revenue, reducing expenditure, 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; expense statement.
Non-profit organizations track their revenue and expenses in the financial report called the statement of activities. P&L management refers to how a company handles its P&L statement through revenue and cost management.
Income Statement
One of the two primary financial statements companies uses for reporting their performance, an income statement each report on a different activity or type.
Imperative Things to remember:
The income statement separates a company's revenue, or sales, from its costs. Expenses are divided into two categories:
Net Income
This figure is in essence the same as gross profit but encompasses both revenue and cost of goods sold (COGS). It is total sales-\minus-cost of goods sold. Let's imagine you're a fictitious book company. Say your total net sales for the year were $200,000. Of those total sales, you had to spend $50,000 buying inventory, or COGS. Your net income would be $150,000.
Net profit margin is used to analyze how efficiently a company is using its resources and is expressed as a percentage of revenue. This will show what the business has made, and also see if the company has made a profit.
Expenditure
This is the next category in the income statement and is made up of the total costs and expenses incurred to generate revenue. It includes all operating, administrative, selling, and marketing-related costs as well as taxes, depreciation (for some companies), interest paid on debt, and any other extraordinary items that would affect said figures.
This figure should be determined after calculating any non-recurring factors that could possibly disrupt the income statement. Interest expenses are typically subtracted from revenues to determine net income. This principle remains constant across all types of business operations, with the exception of not-for-profit organizations.
Operating Expenses
Operating expenses can be seen as an expense a company must incur to continue running. Examples of operating expenses are staff wages and office supplies. Operating expenses differ from CoGS, in that they don't consist of materials such as material, direct labor, or manufacturing overhead costs. Capital expenditures on the other hand cover larger expenditures like for example buildings and machines.