“The first rule of business is to survive and the guiding principle of business economics is not the maximization of profit, it is the avoidance of loss.” -Peter Drucker
There are many complex concepts of accounting, business & finance that cannot quickly be grasped by individuals who do not have experience or secular training in these sectors.
It is certain that many accounting principles are difficult to understand in the beginning, however, on the other hand, various individuals do not attempt to learn valuable accounting or business related notions such as filling out an invoice, calculating business expenses or doing income taxes due to the fact that they believe it is best left to the professionals.
Nevertheless, there are many online resources and well-written articles in finance magazines that make learning the basic concepts of accounting a piece of cake!
Superprof is here to instruct curious individuals what a profit and loss statement is, how to read one and finally how to create one that can be used for future business ventures.
A profit and loss statement, also abbreviated as a P&L statement, is a financial statement or document the briefly summarises the revenues, costs, and expenses that were incurred during a specific period. The particular period is usually a fiscal quarter or year.
The information included on a profit and loss statement offers precious information to readers about the company’s ability or inability to generate profit by increasing revenue, cutting down on costs or doing both.
Depending on the business or geographic location, some refer to a P&L statement as an income statement, statement of operations, statement of financial results, earning statement or an expense statement.
There are three financial documents that every registered company or enterprise publishes quarterly and annually. The three papers are the balance sheet, the cash-flow statement and, of course, the profit and loss statement.
The income statement or P&L statement is quite similar to the cash-flow statement which shows changes in accounts over a specific period. The balance sheet is slightly different the previously mentioned statements and shows what a company owes and owns at a given moment in time.
Many people, who have no previous knowledge of accounting-based subjects or key accounting terms, claim that balance sheets and P&L statements are the same. However, this belief is entirely false. There are several differences between the two such as the following:
Since profit and loss statements are well organised financial documents, there are a few main categories that can always be observed on a P&L statement. The following are examples of the commonly found types:
A profit and loss statement is prepared based on accounting principles such as revenue recognition, matching and accruals, which make it different from the cash flow statement.
It is important to note that it would be extremely beneficial for entities to compare income or P&L statements from different accounting periods. The changes in revenues, operating costs and net earnings are significant figures that help business owners identify the financial health of their company.
By reviewing past P&L documents, financial advisors may quickly identify the facts that your company’s revenues have increased, but the expenses are growing at a faster rate. This may be a great wake up call to cut down on unnecessary costs!
After acquiring a basic understanding of the featured sections on a P&L statement, reading them is a piece of cake! (Source: Amazon and Corporate Finance Institute)
As we have previously stated, a profit and loss statement tells an individual if their company is profitable or not. Defining a P&L statement is far more comfortable than correctly reading one because, for the majority of people, it looks just like a big jumble of numbers!
To avoid confusion and show curious persons that reading a P&L document is quite straightforward and easy to understand, we will provide a quick run-down and explanation of what each section means and how the numbers are determined.
The following are the various sections of a P&L statement and what they signify:
Who said reading a profit and loss statement would be difficult? After understanding each function or section of a P&L document, a person gains confidence and feels ready to create their own.
An accurate list of all business transactions is needed to create a faithful P&L statement. (Source: pixabay)
P&L statements are not only for multi-million-pound corporations but also for small businesses who want to have the necessary financial documents that will help them determine the economic prosperity and future of their enterprise.
It is important to note that there is required information needed to prepare a P&L statement. Certain things needed are the following:
After all the required information has been found, business owners can start to prepare their profit and loss statement.
Firstly, your business revenue for each quarter of the year needs to be shown. Secondly, business expenses for each quarter are calculated. Thirdly, then the difference between sales and costs can be calculated to determine the total amount of earnings. Fourthly, the interest paid for debts is written down on the statement. Fifthly, list the taxes that need to be paid. Lastly, show total depreciation for the year and subtract.
After the six previously mentioned steps are completed, the number that you are left with is your business’ net earnings or total profit.
Thanks to the technologically advanced world that we live in, many profit and loss templates can be found online and used to effectively create this significant financial statement.
P&L statements are great tools used to foresee the financial prosperity of a company. (Source: pixabay)
Every single concept, theory, strategy and manufactured object have its advantages and disadvantages. Therefore, a profit and loss statement is no different. The P&L statement is commonly used in a business setting to track the financial statements of a company and analyse how the entity is performing.
Without further ado, we will review the advantages and disadvantages of the profit and loss statement. Here are the benefits that business professionals enjoy:
The previously mentioned examples are the advantages appreciated by many accountants, bookkeepers and finance professionals. However, just like anything else, there are some disadvantages. Here are a couple of drawbacks of P&L statements:
In conclusion, profit and loss statements can be read, understood and created by a wide variety of business, finance and accounting enthusiasts.
Learning more about accounting concepts and principles has never been so accessible primarily due to the incredible resources that are available online. So, why are you still waiting? Become a finance pro today!