Profit and Loss Account Statement : 4 things to know
A profit and loss account statement, also known as an income statement, is one of the three main financial statements used to evaluate a business's financial health. It provides information on the business's growth, current state, and future prospects. It is an important document for business owners to understand. In this guide, we will explain what a profit and loss account statement is, its significance, what it includes and how to create one.
The profit and loss account statement – a definition
The profit and loss account statement is usually generated once every financial year or once every accounting cycle. Based on the information gathered in a business’s general ledger and subledgers, a profit and loss account statement will provide detail on all revenue generated by a business, all debts and liabilities, costs and expenses that were incurred during a certain time period. It is said to be one of the three most important financial statements, alongside the cash flow statement and the balance sheet.
Why is a profit and loss account statement so important?
According to UK law, a profit and loss account statement must be produced every financial year by a company if it has subsidiaries and is not considered a small business. Regardless of the size of the enterprise, however, this document can provide valuable insights into the financial situation of a business.
The profit and loss account statement details information that provides a clear picture of whether or not a business is turning a profit. Accountants, investors and lenders can analyse this data and then form an opinion if the business will prove to be a good investment risk or not. The profit and loss account statement is often required by would-be lenders and investors in conjunction with the other two major statements and the appropriation account details.
Business owners can use the information on the profit and loss account statement to see what areas of the business are performing well and what areas they may need to focus on. A business owner can also compare profit and loss account statements from different years or accounting cycles to identify positive or negative performance trends.
What is included in a typical profit and loss account statement?
What is included in a profit and loss account statement and the amount of detail that is provided can vary from business to business. Regardless of these variations, however, there are some main categories that will be included in every profit and loss account statement template.
A profit and loss account statement will include precise information on:
- All sales revenue and other revenue generated by the business
- The cost of the goods or services that were sold
- All selling, general and administrative costs. Known as SG&A costs, these costs can be derived from everything from marketing campaigns to rent or travel expenses
- Any interest expenses
- Details on all taxes that have been paid
- The total net income of the business
How to use the profit and loss account statement
To determine whether a business has made a profit or not, a business owner must add up the value of all liabilities and debts incurred and then subtract that total from the total of all monies paid to the business within the accounting period. If the result does not fall into the negative range, then the business has made a profit. The greater the difference between the negative or positive figure and zero shows how profitable the business is or how poorly it is performing.
Single-step and multi-step income statements
It should be kept in mind that the above calculation is used for what is known as a single-step income statement. This is a statement that provides only the essential data required to determine the profitability of a business. There are also more complex statements known as multi-step income statements. Multi-step income statements use a variety of complicated calculations that factor in operating and non-operating expenses to determine the overall financial health of a large enterprise.
Do you need an accountant to prepare a profit and loss statement?
Technically speaking, any business owner can collect the required data and create a profit and loss statement themselves without the need for assistance from a professional accountant. Many business owners use specialised accounting software to help them gather information on the expenses incurred and the gross revenue generated by their business.
One of the most valuable tools you can use to track your business expenses is the Mooncard payment card. The Mooncard payment card system makes keeping track of your expenses simple. Every time a purchase is made on behalf of your business, Mooncard uses a digital photo of the receipt to automatically generate an expense report. This report is then sent immediately to your email or to your accountant. It’s that easy! If you would like to see exactly how the Mooncard system works, just go to the website to arrange a free, no-obligation online demonstration.
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