Understanding Your Financial Statements: The Income Statement and Profit and Loss
With Calathea Accounting
The Income Statement (P&L) shows the profit or loss that the company made for the accounting period by listing all of the income and expenditure. The income statement will give a general overview by stating figures for turnover, cost of sales, gross profit and operating profit.
The Detailed Profit and Loss will then give a further breakdown of these figures so you can see exactly how they arose.
The figures in the Income Statement and Detailed P&L are for transactions over the entire period in question. Unlike the Statement of Financial Position/Balance Sheet which will show cumulative figures from previous periods.
The Profit and Loss gives you insights into how well your business is performing and its profitability. It can be prepared at the end of every month, quarter, accounting year end or at any other point in time when its needed.
Income
At the top of the P&L is the figure for income which can also be referred to as turnover, revenue or sales. This will show income in relation to the main business activities of the company, for example, from the sale of goods or services.
It will then go on to state ‘Other Income’ which will include income from interest, dividends, miscellaneous sales, rents, royalties and gains from the sale of capital assets.
Expenses
Expenses are categorised as cost of goods sold or direct costs and then underneath, other expenses.
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The cost of goods sold refers to direct costs of producing the goods that are sold by the company. This will include the cost of any materials and labour that are directly used to produce the goods.
Other expenses are all the other expenses that are incurred in running the business.
The P&L is based upon the formula of Income – Expenses = Profit or Loss
The total income minus the total expenses, as shown in the formula then gives us the net profit figure. Which should hopefully result in a profit but can also result in a loss!
Net profit is also referred to as ‘the bottom line’. This is the actual profit or loss that the company made over the period in time.
For comparison, gross profit is the total sales minus the cost of goods sold.
The P&L can be used to track your profit margin figures to ensure your company is in good financial health.
Start by looking at your net profit margin and gross profit margin and tracking them over time to see how they are performing.
Are there fluctuations for seasonal variations and annual trends? If you can spot these then you can plan for the effect these trends may have on your expected sales or profit.
Your financial statements are valuable tools to enable you to monitor and track your businesses performance. They ensure that you are looking at your business as a whole which will help you to plan for the future as best you can.
