Profit & loss statement – What is a profit & loss statement?
The profit and loss account shows the revenue and losses of a business over a given period of time.
More specifically, it shows the net profit or loss your business has made within an accounting period after deducting all expenditure from the income. A net profit is earned if the total expenditure is less than the sales amount, and a net loss is if the expenditure is greater than the sales amount.
The profit & loss statement is considered one of the most important documents for keeping an eye on the financial health of a business. It’s also sometimes referred to as the ‘income statement’.
For all private limited companies, the profit and loss statement is part of annual statutory accounts.
An essential objective of a business is to make a profit. The P&L statement shows the extent to which it’s been successful in achieving this objective.
Companies are expected to keep their P&L statements in certain formats. Typically, the P&L statement will show the revenues received by a business and the costs involved in generating that revenue. In simple terms:
Revenues - Costs = Profits
In addition to the profit and loss statement, the balance sheet is an important financial statement for a business. The data gathered from these two reports can provide useful information for the owners and managers of a business.
The profit & loss report, balance sheet, and other reports illustrate how well a business is operating, whether there are any areas where spending can be improved, and whether a company has been consistent in its earnings.
Typically, a profit & loss statement is created at the end of accounting periods - for example, at the end of each quarter. This allows a business to stay on top of its financial situation and make adjustments for the coming quarter.
To calculate the net income, also known as the profit, the general costs of running the business are subtracted from the revenues. These costs include:
Expenses for operating the business
Any interest paid
By subtracting these costs from the business’ sales revenues, the profit and loss statement provides a business with a cleaner, clearer understanding of their revenues and losses.
The P&L will generally include the sections "Income" and "Costs" with multiple subheaders underneath to further categories the types of income and costs incurred.