What Is Profit And Loss Statement?

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A company compares its actual P&L figures to predictions or industry benchmarks and accordingly makes adjustments in future strategies. The P&L outcome plotted on a trendline assists investors in understanding the organization’s performance over time. However, the results of P&L vary as per the accounting technique employed – cash basis or accrual accounting basis.

Key Takeaways

  • A profit-and-loss statement is a company’s financial record documenting costs incurred and revenues collected to determine the company’s profit for a specific accounting period.Two approaches to calculating P&L statements are: cash accounting and accrual accounting are both viable approaches.Publicly-traded companies must prepare financial statements like P&L statements and file the same with the U.S. Securities and Exchange Commission (SEC)The P&L statement follows a sequence: recording revenue, assessing COGS and gross profit, adding overhead expenses, netting operating income, and adjusting income receipts plus expenditures to the firm’s net profit.

Profit and Loss Statement Explained

The P&L statement is a financial report containing a company’s costs, profits, and revenue. The report helps investors determine a company’s profitability. It also demonstrates the company’s ability to increase sales and profits by controlling its debts and costs. Publicly-traded companies must prepare financial statements like P&L statements and file the same with the United States Securities and Exchange Commission (SEC). The profit and loss statement self-employed individuals are prepared similarly to the P&L statement for corporations.

The basic profit-and-loss statement’s first line highlights the company’s annual gross income from sales and external sources. The company’s expenses, such as marketing costs and salaries, come after the revenue. Therefore, it helps investors derive a firm’s net profit, which is determined by subtracting its gross costs from its sales. One can calculate the company’s overall profit by utilizing its sales and deducting its expenses.

Further, a P&L statement is created using two distinct accounting methods:

#1 – Cash Accounting Basis

To calculate the cash-basis P&L statement, subtract the total costs incurred by the firm from the total cash revenues generated from its products and services sales during the accounting period. It is also considered a simple profit and loss statement.

#2 – Accrual Accounting Method

In this method, all revenue receipts and expense vouchers are continually documented in the ledger against the matching money paid out or received by the business. This strategy is often referred to as the matching principle. It mandates that a corporation must match all of its income collections for a specific time to its spending for that period.

Sample Profit & Loss Statement

A profit and loss statement template is shown below to help understand its components better:

Example

Let us look into the profit and loss statement example using the case of Walmart. In the United States, Walmart Inc. is a retail company running a supermarket chain, discount department stores, and hypermarkets worldwide. The income statement of WallMart is linked here for your reference. One can compare it across five years to see how P&L reflects a company’s financial standing.

How To Read P&L Statement?

The P&L statement is the entryway to an in-depth financial analysis of a firm since it enables investors to study the sources of income and the areas of expenditures. In common parlance, the P&L statement is analogous to a soccer scorecard in that it aids in assessing a company’s strengths and shortcomings to devise plans for reaping profits and sustaining development.

Income, taxes, and costs are examined to comprehend the P&L statement. In addition, the following elements can be used to analyze expenditures and revenues:

  • Sales or Revenue: – It depicts the detailed income from numerous sources to assist in evaluating a firm’s revenue sources and analysis.Cost of Goods Sold or Cost of Sales (COGS):- COGS refers to the cost of producing a product, such as a cost to a firm that manufactures automobiles.Expenses – Operational:- These are the administrative costs incurred by a business, including salaries, benefits, utilities, and office space rental.Advertising and Marketing:- These are the funds a firm spends on promotional initiatives to acquire new consumers and grow its business.Selling, General & Administrative (SG&A): – These expenses are recorded in the expense header of the income statement, which summarises all costs associated with advertising, selling, and delivering goods and services and managing everyday operations. SG&A demonstrates a company’s control over overhead costs and ability to reduce costs to sustain rising earnings.Expense – Interest:- As a non-operating item on the income statement, they are the charges connected with the company’s capital borrowing in the form of interest expenses.Taxes – It is the amount of taxes a business or individual owes to the government after multiplying their taxable income by the applicable tax rate.Profit or Net Income:- Profit or net income is determined by deducting total costs from the P&L statement.

This has been a guide to What is Profit and Loss Statement. We explain how to read P&L statements, its sample, and example. You may learn more from the following articles –

A fundamental requirement to create a P&L statement is to have complete information on revenues, costs, and a tax summary to create a P&L statement in Excel. Begin with computing the revenues in an Excel sheet using the SUM function in the revenues column. Next, calculate total expenses using the SUM method over the costs column. Now, locate the cell that contains the formula net income = gross income minus taxes. If the outcome is positive, there is a profit; if it is negative, there is a loss.

Self-employed or sole-proprietorship businesses are required by the U.S. Internal Revenue Service to report their profit and loss under Section C on Form 1040. Therefore, self-employed individuals will generate their P&L statements using the same structure as firms.

Audited P&L is the process of evaluating the accuracy of the data recorded in the P&L statement concerning the firm’s invoices, vouchers, and transaction records. The legislation mandates a yearly audit of P&L statements per national and international accounting practices.

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