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Profit & Loss Statement: Purpose & Benefits

Profit & Loss Statement: Purpose & Benefits

What is a Profit and Loss Statement?

After every financial year, it is normal for businesses to know if they are making a profit or losing. A company can access its revenue, expenses, costs, and others incurred over time with the profit and loss statement. With such a statement, a company can know if it can generate sales or not, take care of its expenses, and go for more profit via boosting revenue, reducing costs, or both. 

It is one of the significant financial statements of any company that reveals the profit and Loss based on accounting. This includes total sales, return, entire purchase, stock value, payable tax, expenses and income. 

Other names for the profit and loss statement are the income statement, income earnings statement, statement of operation, trading account, etc. 


Components of Profit and Loss statements 

The profit and loss statement is paramount to know if your business is making money or losing in a given period. Here are the major components of a profit and loss statement:

  1. Revenue

This is the entire income a company generates through the sales of goods and services before removing any interest. Even though revenue refers to a company's funds, a firm might generate good revenue and still have a net loss.

  1. Cost of Goods Sold (COGS)

This refers to the direct costs of goods a company sells – firms into manufacturing or wholesale, etc. It also includes direct expenses that have to do with the production and purchase of goods.

Before gross profit can be estimated, the COGS is usually deducted from revenue. The higher the cost of goods sold, the lower the gain. 

  1. Gross profit or Loss

This refers to business efficiency. More profit is an indication of a healthy business. However, if the gross profit reduces with time, it is essential to look into it.

  1. Expenses

This section covers various bills like administrative expenses, depreciation or indirect expenses, distribution expenses, etc. Your business is profitable if you spend less of your income on costs.

  1. Other Income

Your indirect income, such as discount received, payment from non-trading, bad debts you got, all commissions received, etc., will be classified under this section.

  1. Taxes

This is where you will either add or subtract your entire payable and receivables.

  1. Net Profit and Loss

This is a pointer to the profit you have made from every dollar spent. A decrease in net profit indicates that you are paying more in expense, which needs your action. 


Purpose of a Profit and Loss Statement

The idea behind a profit and loss statement is to shed light on the firm's financial performance over a given period. There are many reasons behind the preparation of profit and loss statements. Some of these are:

  1. It reveals the expenditure and revenue of a firm

  2. A business can know if it earns or incur profits or losses

  3. As a part of the statutory requirement

  4. To explore the profitability of a firm

  5. To estimate your firm’s return on equity. This happens by comparing the net income to the shareholder’s equity level as revealed on the balance sheet.

 

Benefits of the Profits and Loss Statement

The profit and loss statement is one of the most popular and important financial statements of any business. It effortlessly reveals essential info about the profit and Loss that a business generates. Some benefits are:

  1. Such a statement can take care of the operational efficiency of the firm. This is because the direct and indirect expenses alongside the direct and indirect losses are functions of the profit and loss statement

  2. Such a report helps control indirect expenses since it provides valuable information about such expenses. 

  3. It can guide you towards the tax that applies to your profit.

  4. It can help shed light on business performance which helps in comparison to previous financial periods. With this, one can track business improvement.

  5. Perfect indicator of the business’s health

  6. It will be handy in making future decisions and plans

  7. It can act as a financial statement. With such information, loans from the bank will be easier and faster. 


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