Understanding Your Income Statement.

What is Profit & Loss Statement?

The term profit and loss (P&L) statement refers to a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period, usually a quarter or financial year. These records provide information about a company’s ability or inability to generate profit by increasing revenue, reducing costs, or both. These statements are often presented on a cash or accrual basis.

Key Takeaways

A historical record of the trading of a business over a specific period.

It shows the difference between the firm’s total income and its total costs…….Profit or Loss.

A condensed income statement will have three main categories: revenues, expenses, and net income or loss.

It can then be integrated into a proper financial model to forecast future performance.

If revenue exceeds the total expenses, the income statement shows a net income for the period but if, on the other hand, the total expenses exceed the revenue, it would show a net loss.

Sample Income Statement

Why Is A P & L Report Important?

The income statement serves several important purposes –

1. It tells management, self-employed or shareholders how the business earns revenue and where the money is being spent.

2. Allows shareholders/owners to see how the business has performed and whether it has made an acceptable profit (return).

3. Enables comparison with other similar businesses (e.g. competitors) and the industry as a whole.

4. Allows providers of finance to see whether the business is able to generate sufficient profits to remain viable (in conjunction with the cash flow statement).

5. Allows the directors of a company to satisfy their legal requirements to report on the financial record of the business.

Components of an Income Statement.

The income statement may have minor variations between different companies, as expenses and income, will be dependent on the type of operations or business conducted.

However, there are certain lines that are generic to all income statements:

  • Revenue/Sales: The company’s revenue from sales of goods or services during the reporting period.
  • Cost of Sales: The direct costs associated with selling products to generate revenue. This would include the cost of raw materials, components, goods bought for resale, and the direct labour costs of production.
  • Gross Profit: The difference between the Cost of Goods Sold (or Cost of Sales) from Sales Revenue.
  • Operating Expenses: This encompasses the selling, general, and administrative section that contains all other indirect costs associated with running the business. This includes salaries and wages, distribution costs, rent, and office expenses, insurance, travel expenses, marketing expenses, and sometimes depreciation and amortisation, along with other operational expenses.
  • Operating Profit/ (Loss) This records how much profit/ Loss has been made in total from the trading activities of the business before any account is taken of how the business is financed or taxed.
  • Finance expenses/ Interest Interest paid on bank loans and other borrowings, less interest income received on cash balances.
  • Profit/ (Loss) Before Tax Also known as pre-tax income and is calculated as operating profit less finance expenses.
  • Income Taxes An estimate of the amount of corporation tax that is likely to be payable on the recorded profit before tax.
  • Profit/ (Loss) for the period/ Net Income The amount of profit that is left after the tax has been accounted for. This is the amount that flows into retained earnings on the Statement of Financial Position, after deductions for any dividends.

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