How to Explain a Profit-Loss Statement
The profit and loss statement, also referred to as an income statement in some business circles, provides a clear illustration of the revenues and expenses that your company has recognized during a specified operations period. It helps management and investors see how profitable the company has been for that period. The profit and loss statement ends with a net income or net loss figure, detailing how much the company either earned or lost after accounting for operating expenses. The profit and loss statement is part of most routine closing cycles.
Understanding the Header
Although header information may seem inconsequential, in the case of financial statements like the profit and loss statement, it serves an important purpose. The header details the accounting period that the statement applies to and the date when it was prepared.
Sales and Revenue
The sales and revenues section of the profit and loss statement illustrates all of the standard revenue sources that the company has recorded during the reporting cycle. This typically includes sales, service revenue, sales discounts and allowances, and the cost of goods sold. The bottom of this section is the gross profit figure, which is the sum of all of the primary revenue sources less the discounts, allowances and cost of goods sold.
Expenses from Operations
The expense section details all of the business-related expenses for the period. This includes facilities, payroll, administrative expenses and utilities. You can list operating expenses in a single section, or you can separate them into sales costs and administrative costs. At the bottom of this section, a subtotal line illustrates the total expenses for the accounting period.
Unusual and Extraordinary Transactions
Any significant financial transactions that are not a part of traditional business operations belong in a separate section labeled as extraordinary or unusual transactions. Any business segment sales, new divisions, severe damage due to weather or other major events belong in this section. It is important to isolate these transactions because they are financially significant but unusual enough that they may only happen once. When investors evaluate financial statements, it is important that they understand any unusual financial transactions. Footnotes at the bottom of the statement are important to identify the source of the transaction.
Net Income or Net Loss
The final line of the profit and loss statement illustrates the net income or net loss recorded for the period. This figure represents the gross revenue less the total expenses and any unusual activities. If the figure is negative, the company has recorded a loss for the period.
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