Statement of Profit and Loss

A profit and loss statement is a financial statement that details the Revenue from operations, costs, and expenses during a particular period of time, generally a quarter or a fiscal year. It is also called an income statement, net income statement, or statement of earnings. It provides information about a company’s ability to generate sales, reduce costs, and drive revenue. The P&L statement shows changes that occur over a period of time. Public companies need to produce and release P&L statements every year in order to make corporate business finances transparent. It is useful for both big corporations and small business owners as well.

Types of Profit and Loss Statements

A profit and loss statement could be prepared in two ways:

Cash Method

The cash method is used when cash comes in and goes out of the business. It is a simple method that accounts for cash received and paid. Whenever cash is received it is recorded as revenue and when cash is used to pay bills and liabilities it is recorded as a liability. Generally, smaller companies or people who want to manage their personal finances use this method.

Accrual Method

This method records revenue as it is earned. A company using this method records transactions for the money it’s going to receive in the future. For e.g. a company records revenue on its P&L statement for a product or service delivered to its customer even though it hasn’t received the payment yet.

What Does a Profit and Loss Statement Contain?

While formulating a profit and loss statement, there are some categories it must cover. Some important sections to be included are:

• Revenue from operations: The income that a company receives from its normal business operations is known as revenue from operations also called sales revenue or operating income. Sales of products and services, other operating revenue and other income all come under total revenue.
• Cost of goods sold: The direct cost that a company bears for selling its goods or services is termed as the cost of goods or cost of sales. It also includes labour and raw materials costs. 
• Itemized expenses: The income statements must have a detailed list of distinct expenses like rent, selling, administrative expenses, equipment, and marketing expenses. For showing the cost of fixed assets, some companies often include depreciation in their total expenses. While some companies separate their expenses into day-to-day internal expenses that they have more control over and external expenses like income taxes and interest expenses which aren’t in their control. Separating expenses helps companies to calculate their operating profits.
• Net Profits: The final line of your income statement is the net profits. Basically, net profit is the gross profit minus all the expenses. Whether you are making the income statement quarterly or annually, it indicates how your company made profits or bared losses.

Benefits of Analyzing a Profit and Loss Statement         

A P&L statement gives an accurate assessment of a company’s income by subtracting the expenses from the revenues. Some advantages of analyzing a profit and loss statement are:

• It makes it easier to plan for the future: A P&L statement helps the company to make decisions regarding future expenses. Being aware of the present financial status and how the future income is going to be impacted may benefit in prioritizing the decisions needed to be made for the health of the business.
• It shows the condition of your business: A P&L statement may show the current financial status of the business and bring to your knowledge any issues within the company that you weren’t aware of.
• It can bring in more investors: A P&L statement makes the business finances transparent and a profitable business could attract investors who are looking for a promising company to invest their money in. And more investors means more money that you can spend on optimizing operations, marketing, and employment which in turn helps you maximize your profits.

Are All Companies Required to Prepare P&L Statements?

Private companies may not be required to prepare the statements and some smaller companies may even not prepare financial statements at all. However, public traded companies must prepare P&L statements and file them with the Securities and Exchange Commission for the investors and analysts to examine.

Conclusion

The statement of profit and loss contains information about the revenue and expenses of a company. According to the operating procedure of a business, these statements are prepared on a monthly, quarterly, or annual basis. It allows a company to see the trends in revenue and expenses and to allocate resources accordingly.