Profit, Loss and Discounts

Meaning of Profit, Loss, and Discount

Profit and loss are topics that usually go hand in hand. Profits are the excessive amount generated from the sales of goods or services. Profits arise from the excess of the sale of goods when compared to the cost of goods. This excess in amount is a positive outcome for the business and tells if the business is running properly or not. Loss is the exact opposite of profit and concerns the deficit in return on investment, that is the cost of goods has a higher value than the sale of goods. This scenario causes the business or the organisation to produce negative income or as defined, “loss”. The two factors contribute to the business or a company immensely on a daily basis, any changes in these factors affect the business positively or negatively. Discounts are a type of payment that is received or paid on services offered or consumed. These payments are made with a lower value than the actual face value of the good or service in the market. These are basically a mode for incoming from depreciating assets. The goods and services lose value over time and hence, are sold at discounts.

What is a Profit and Loss statement?

A profit and loss statement or P/l statement is a type of financial statement that is made in regards to recording expenses, revenue, and different costs that happened in a period that is usually a fiscal year or a quarter. Profit and loss statements help in calculating if the business or company is producing enough profit or loss, which lets us determine where the problems arise when losses occur or we can assess from where the profit came from. These statements are usually mentioned on a cash basis if not an accrual basis The profit and loss statement is one of the three major statements a company issues along with the cash flow statement and balance sheet.

How does a Profit and Loss Statement Work?

The profit and loss statement records the revenue generated in a period of time from any source and subtracts it from all the expenses or costs incurred by the business in the same period. This tells us if the business has more expense on the cost of goods purchased, invested on or has a positive growth in capital of the company from revenues.

Example of Profit and Loss Statement

The profit and loss statement is prepared by recording all the transactions happening in a set period of time. The following example will tell you how a profit and loss statement looks like:

Statement of P/L

	Twelve months ended March 31 Particulars		Current year	Previous year
1	Revenue from operations
2	Other income
3	Total revenue (1+2)		xx	xx
4	Expenses
	Cost of material
	Purchase stock
	Change in inventory
	Employees benefit expenses
	Depreciation and amortisation
	Total Expense		xx	xx
5	Profit before tax (3 – 4)		xx	xx
6	Less tax		–	–
7	Profit after tax		xx	xx

The following statement shows what a profit and loss statement looks like.As shown above, the total revenue is subtracted from total expense and the tax amount is deducted whatever it may be. The amount after deduction of tax is the profit or loss after tax.

Different methods of preparing a P/L statement

There are two ways for preparing a profit and loss statement that are mentioned below:

• Cash Method
• Accrual Method

Cash method: Cash method is a type of financial method where the cash accounts records cash transactions that happen in a business bet it an inflow or outflow. The cash accounting method exclusively records cash transactions and mention of non cash transactions is not allowed and invalid for a cash account. Wherever cash is used  in business a record needs to be made in a cash account. Small companies use this method of profit and loss statement a lot as there aren’t any major variations in transaction types. Accrual method: Accrual method of profit and loss also takes into account the assessing of the future revenues that are to be earned or liabilities that are to be paid. The accrual method mentions all kinds of future payments as valid transactions that happened in the following period of time.

Conclusion

The profit and loss statement as explained in detailed form above is basically a way of calculating if the company is making excess revenue than the amount it is spending on expenses. This statement is one of the major statements including two more statements namely balance sheet and cash flow statement. Its important for a company to prepare the profit and loss statement as it gives a lot of information about how the business or the company is operating. The profit and loss statement is also called an income statement.