A profit and loss statement is one of the major financial reports along with the balance sheet and cash flow statements. Together, these three main statements over a conclusive overview of business activities. This particular report shows total spending and earnings for the business over a given period of time. The final and most important aspect of the statement is to show if the business has made an overall profit or loss in that time period - hence the name.
Therefore, in short the Profit and Loss Statement tracks earnings and spendings and informs directors about whether they ran at a Profit or Loss over the last period.
A profit and Loss Statement can be done at any time convenient to the business, however is most likely to be conducted at the end of a month, quarter or year.
Unlike the Balance Sheet which is a snapshot of the current business landscape, portraying what the company owes and owns at a given time; the Profit and Loss and Cash Flow Statements show changes within a given time period instead.
All publicly traded companies are required to produce a P and L statement and have to abide by GAAP (Generally Accepted Accounting Principles) for statements to be deemed as valid.
For the income side of the equation, this usually just includes sales recorded. Expenses are likely to include factors such as payroll, advertising, rent and insurance.
There are two main types of a profit and loss statement that can be used.
Firstly, the Cash Method is a simplistic method that only accounts for cash that comes in and out of the business. This method ONLY accounts for cash received and paid, and therefore is useful when a quick and easy method is needed. Therefore it is best suited to individuals and smaller businesses.
The Accrual Method is a more complex method that records revenue as and when it is earned. This method also treats liabilities in the same way. Therefore there are revenues and expenses that are listed on this method that havent yet been paid. This is more detailed and adjusts for future possibilities, therefore it is more suitable for larger businesses who are in need of a more in depth analysis.
Profit and Loss statements are a useful indicator for investors to analyse, determining how profitable a business may be before they invest.
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