Profit and loss statement
A profit and loss statement also referred to as an income statement, revenue statement, statement of operations or statement of financial performance, is one of the financial statements of a company and presents a company’s revenues, expenses and net income or net losses earned in a given accounting period.
Profit and loss statements can be prepared either by a single-step method which is very simple and involves subtracting all the expenses from the income. The complex multi-step method involves multiple steps. The steps include:
• First, subtract the cost of goods sold from the sales/ revenues which presents the gross profit;
• Second, subtract the operating expenses are deducted from the gross profit, which presents the operating profit also referred to as the income from operations;
• Third, non-operating revenues and expenses must be factored; and
• Finally deduct any taxes to finally present the net income.
The profit and loss statement like the cash flow statement represents a period of time, whereas, the balance sheet represents a single moment in time.
Importance of preparing profit and loss statements
Companies are required to prepare financial statements by law including the profit and loss statement, cash flow statement and balance sheet. A profit and loss statement is important as:
• It helps companies understand their business performance status.
• Is used to inform employees and shareholders on the performance of the company.
• It helps creditors and investors and creditors determine a company’s past financial performance, predict future performance, and assess the capability of generating future cash flows.
• Is used as proof of income if a business owner decides to sell his business.
• Is required to apply for a business loan.
• Is important to understand a company’s net income for decision-making processes.