What is in a Profit and Loss Statement?
If you are running a business, you must have used or heard of various financial statements (Also see Financial Statements That Financial Accounting Generates) , for example, the balance sheet, cash flow statement, profit and loss statement and so on. Among all, the profit and loss statement is the one which summarises the revenue earned and the expenses incurred by a company in a particular accounting period. Hence, if you want to know the financial performance of your company in that period, you should look at the profit and loss statement.
Here comes the critical point: Do you know how to account for your profit and loss? In a profit and loss statement (Also see How does the Balance Sheet relate to Profit and Loss?) , there are various elements that you need to deal with carefully. You need to make sure that all the business transactions that you have recorded in your books of accounts are accurate before you can generate that statement. If you are not confident that you can do this well, please do not hesitate seek help from bookkeeping firm in Johor Bahru.
The first element we are going to study here is revenue. This is the sum that you charge to your customers for the goods and services you sell to them. When the accountants are preparing the profit and loss account, they will classify the revenue into a few different groups, for example, non-recurring revenue, recurring revenue, as well as non-trade revenue according to their natures.
Costs refer to the expenses that the company has incurred in an accounting period. In accounting, costs refer to the monetary values of the expenses incurred for products, services, labour, equipment and so on. Costs can be divided into two categories, which are the manufacturing costs and non-manufacturing costs. Manufacturing costs are the costs which are directly related to the production process, and these costs include the direct labour costs, direct material costs, as well as manufacturing overhead. On the contrary, non-manufacturing costs are not directly related to production. They can be divided further into administrative costs and the selling and distribution costs.
In the profit and loss statement, sometimes you will see the accruals and prepayments in it. According to the accrual basis of accounting, one should record the revenue and expense in the profit and loss account in the accounting period in which that transaction occurs. Thus, you should accrue the expenses that you have not received the invoices from your supplier, but you have received the products or services when you are closing your books. The accrual will become your liability, and it will appear in your company’s balance sheet. At the same time, those expenses will appear in your profit and loss statement. The same idea applies to prepayments. This will happen when we have paid for the products or services that we will receive in the future. In the balance sheet, prepayments will appear as your company’s current asset.
Besides, we will see earnings before tax of a company in its profit and loss statement too. This is the amount of profit or loss of the company after subtracting the operational expenses that the company has incurred. The sum of earnings before tax shows the company’s ability in paying for all financial obligations such as paying to its creditors, settling loans, and so on.
After deducting the taxes that the company needs to pay from the earnings before tax, we will arrive at the net profit of the business. In simple words, this is the sum of money left after subtracting all your expenses (Also see Accounting for Expenses) from the income. Net profit will appear as the bottom line of the profit and loss statement.
Accounting for profit and loss is a crucial accounting process. It helps to facilitate the procedures requires for tax filings and audits. Also, business owners can use this statement to prepare complicated reports and carry out analysis on the company’s performance. This would help the company’s management in planning, decision making, as well as the process of determining the areas the company should be more focus on.