A profit and loss statement is more commonly known as a “P and L statement” or an income statement. Generally, it is a financial statement containing a summary of revenue, costs, and expenses that a business has incurred over a specific period. Usually, it is over a fiscal year or a calendar year. However, a profit and loss statement can also cover a quarter or a month.
Why is a profit and loss statement important?
A profit and loss statement is important because its content can indicate the health and profitability of a business. Is the business making money? How much are the total expenses? What did the company spend the most last year?
It is a detailed document that provides a glimpse of how a company is performing. Through a profit and loss statement, one can get information on how an organization can increase revenue and reduce costs.
Additionally, comparing different P and L statements from the past provides historical data to see if there are market or industry trends that affect the company’s revenue, expenses, and other operating costs. To stay relevant, businesses review different profit and loss statements and financial performance over time. This helps in analyzing how adjustments can be made in the present. For instance, are the certain expenses that the company can decrease or forego altogether? An accurate profit and loss statement can help companies plan ahead. Companies can see the summary of a company’s revenue and expenses. Furthermore, the information on a profit and loss statement can be used in completing tax forms.
What are the usual components of a profit and loss statement?
Depending on the industry, there are many types of expenses and revenue indicated in a profit and loss statement of companies. These are what companies need to stay on top of so that they can plan.
Here are some examples of common components of a profit and loss statement:
Revenue: a list of all possible sources of income. This part can be as simple as a yearly revenue forecast that is not directly tied to business operations. Common examples are interest from bank accounts and income made from rent.
Gains: these can include one-time income like selling property, materials, or equipment.
Expenses: all operating costs are included in expenses. For as long as the business shells out money for it, it is considered an expense. Examples are the wages of employees, taxes, bonuses, and commissions for employees, and the cost of goods sold. Administrative overhead expenses are also included like paying rent on properties used, equipment.
Losses: similar to gains, losses refer to one-time costs that equate to a loss for the business. For example, if a company needs to pay a settlement in a lawsuit, this is considered a loss by the company.
Net income: the net income of a business can be derived from a profit and loss statement. In principle, you can get the net income by starting with the total revenues and gains and then subtracting losses and expenses.
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