A profit and loss statement, or P and L statement, is a financial report that summarizes revenue, expenditures, and expenses over a fiscal quarter or year. This study is particularly valuable because it demonstrates a company's financial stability and profitability.
The organizations get historical financial statements for a specific period of time from their P and L statements and hence it helps in financial health declaration in terms of what monitory terms are transacting regarding what is incoming and what is outgoing.
This further helps businesses to know their existing position in comparison with their last quarter or annual financial performance to make strategic plans for future endeavors of the organizational challenges ahead amid turbulent times.
Profit and loss statements are important for companies as it helps organizations to know the below-mentioned parameters:
Revenues and expenditures over the period and at different locations can be easily well defined through your organizational profit and loss statements. Maybe your some costs like marketing, advertisement, and or productions costs cut in the future due to a mature product but the government might raise unemployment tax, fuel prices, or your own office and factory locations’ transportation costs may increase. Therefore, P & L statements are the ones that help you give directions of where you were, where you are, where you want to be, and how.
Your existing and past positions help you to make new business plans for the future. As your future business has no profit and loss at the stage but your other business units might help n cross-comparisons in terms of costs you incurred and profits you had.
Your business profit and loss statements help you in tax calculations of what you had, what you spent and what you made, what is taxable and what is not.
Generally, revenues and expenditure are shown in profit and loss statements, however, there are certain types of profits and losses. Below mentioned are included in the P and L statements:
Other types of heads or subheads which might be part of your profit and loss statements are as under:
A balance sheet represents your Assets (what you own), Liabilities (what you owe), and Equity (shares value), whereas a P and L statement shows what revenues you had and what expenses you made, hence having your business standing at your hand.
The profit and loss statements are the ones that almost every business issues every quarter or at least annually or at any fixed period to see into the financial position of the organization. P and L statements are the ones which are one of three financial documents, other two are balance sheet and cash flow statements. All these three together declare your financial standings at the stage in comparison with preceding times of your business.
Other names of profit and loss statements are:
The special considerations for profit and loss statements are that the profit and loss statements must be checked for at least every quarter, in different accounting periods from every perspective so that to know what are you profiting from (like which business process is more profitable) and where are you spending (like which specific area is your more spending one, and that may be research and development, etc.).
This helps organizations to look into what pace is of profitability and at what pace are the expenses taking place, and then take decisions accordingly.
Following are two types of profit and loss statements, through which such statements are prepared for businesses:
This method is used when there is only cash inflow or outflow in or out of your operating business, respectively. For example, whatever profit you earn, being a small company, your cash flows in, and whatever utilities and salaries you pay are your cash outflows.
When outflows of cash are subtracted from your cash inflows, you get net income. If that net income is a positive value that is greater than zero that is your profit and if that net value is minus and you owe to pay to someone that is your loss. This method can be used for personal finances as well, on a smaller scale by an individual.
This method is used in organizations whereby revenues and expenses are recorded on pre receiving or spending method. For example, if Company A sells a particular product to Company B, the revenue to be received is listed in the profit and loss statement. Similarly, the utilities which are yet to be paid at month-end are recorded before such payments are made as expenses. These are accounted for before any actions are done and are to be done on a routine basis.
For calculating profit and loss you have to follow eight steps as mentioned below:
Below mentioned is an example of profit and loss statement for readers’ understanding:
The aforementioned profit and loss statement is showing no losses so far in the year ended December 2020 and December 2021, this is showing 24 months of performance of a small software house operating with limited revenue and expenses. At the end of the year, 2021 when 12 months period is completed the company is a profit of USD 4,500 at hand as compared to the year 2020 figures of having a profit of USD 1,620 only.
Research, as of January 2022 published by Social Science Research Network (SSRN), tells that financial statements keep investors informed for decision making, provided the transparency is followed in businesses, especially in financial reporting systems. Moreover, the published research says the fair value method in accounting – introduced in 2003 – is the best practice for increased accountability, transparency, and comparability between financial statements.
Whereas, the fair value method in accounting is that the assets and liabilities are traded on fair market existing rates so that both the parties, buyer and seller benefit from the sale.
Moreover, your assets are cash, cash equivalents, accounts receivable, inventory, etc. And your liabilities are your debt, overhead costs, accounts payable, dividends owed; etc.
Either that are your cash flow statements, costs, and expenses, operating expenses, statement of profit, income statement, net income, revenues and expenses, company s financial standing, or your bottom line strategic decisions, costs of goods sold, company’s assets, profits losses, income and expense, financial reports, or the new plans to generate profits; for all the dominion you need to have on the table sod discussion your P and L statement to know where you were, where you are; and where are you heading.