Profit and Loss Statement - P&L
Definitions: A document generated monthly and/or annually that reports the earnings of a company by stating all relevant income and all expenses that have been incurred to generate that income. Also referred to as a profit and loss statement.
OR
A financial statement that summarizes the revenues, costs and expenses incurred during a specific period of time - usually a fiscal quarter or year. These records provide information that shows the ability of a company to generate profit by increasing revenue and reducing costs. The P&L statement is also known as a "statement of profit and loss", an "income statement" or an "income and expense statement"
Income statement (also referred as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations)
What is It
The income statement is a simple and straightforward report on a business' cash-generating ability. It's a scorecard on the financial performance of your business that reflects when sales are made and expenses are incurred. It draws information from the various financial models such as revenue, expenses, capital (in the form of depreciation) and cost of goods.
By combining these elements, the income statement illustrates just how much your company makes or loses during the year by subtracting cost of goods and expenses from revenue to arrive at a net result, which is either a profit or a loss. It differs from a cash flow statement because the income statement doesn't show when revenue is collected or when expenses are paid. It does, however, show the projected profitability of the business over the time frame covered by the plan. For a business plan, the income statement should be generated on a monthly basis during the first year, quarterly for the second and annually for the third.
Your income statement lists your financial projections in the following manner:
- Income includes all the income generated by the business.
- Cost of goods includes all the costs related to the sale of products in inventory.
- Gross profit margin is the difference between revenue and cost of goods. Gross profit margin can be expressed in dollars, as a percentage, or both. As a percentage, the GP margin is always stated as a percentage of revenue.
- Operating expenses include all overhead and labor expenses associated with the operations of the business.
- Total expenses are the sum of cost of goods and operating expenses.
- Net profit is the difference between gross profit margin and total expenses. The net income depicts the business' debt and capital capabilities.
- Depreciation reflects the decrease in value of capital assets used to generate income. It's also used as the basis for a tax deduction and an indicator of the flow of money into new capital.
- Earnings before interest and taxes shows the capacity of a business to repay its obligations.
- Interest includes all interest payable for debts, both short-term and long-term.
- Taxes includes all taxes on the business.
- Net profit after taxes shows the company's real bottom line.
Although the basics of an income statement are the same from business to business, there are notable differences between services, merchandisers, and manufacturers when it comes to the accounting of inventory.
For service businesses, inventory includes supplies or spare parts--nothing for manufacture or resale. Retailers and wholesalers, on the other hand, account for their resale inventory under cost of goods sold, also known as cost of sales. This refers to the total price paid for the products sold during the income statement's accounting period. Freight and delivery charges are customarily included in this figure. Accountants segregate costs of goods on an operating statement because it provides a measure of gross profit margin when compared with sales, an important yardstick for measuring the firm's profitability.
For a retailer or wholesaler, cost of goods sold is equal to total inventory at the beginning of the accounting period plus any merchandise purchased, including freight costs, minus the inventory present at the end of the accounting period. This is your total cost of goods sold.
Although manufacturers account for cost of goods sold in the same manner as merchandisers by reporting beginning and ending inventories, as well as any purchases made during the accounting period, their approaches are also different because they track inventory through three phases.
- Raw material is purchased to create a finished product.
- Work-in-progress is inventory that is partially assembled.
- Finished products are inventory fully assembled and available for sale.
Associated with this process are other costs, such as direct labor and factory overhead. To account for all these costs, manufacturers usually report them on a separate statement called the "cost of goods manufactured." This statement is formed by first listing the work-in-progress inventory at the beginning of the accounting period. The next listed are raw material and direct labor. The total cost of materials available for use includes inventory at the beginning of the accounting period plus new purchases and freight charges. Subtract the raw material inventory present at the end of the reporting period from the cost of material available for use to determine the cost of materials used. Add direct labor and manufacturing overhead to this amount. This results in your total manufacturing costs. Add the work-in-progress beginning inventory present at the end of the accounting period. This supplies you with the cost of goods manufactured.
In the income statement for manufacturers, cost of goods manufactured is added to the finished goods inventory at the beginning of the inventory, resulting in total cost of goods available for sale. The finished goods inventory present at the end of the reporting period is subtracted from this amount to produce the cost of goods sold.
Format of the Profit and Loss Account:
Profit and Loss Account
For the year ended ..............
For the year ended ..............
|
|
|
|
Closing Entries for Profit and Loss Account:
The following usual entries are passed at the end of each trading period.1. Transferring all expenses or losses:
Profit and loss account
To Each of the various expenses or losses
(This entry will close the expenses accounts)
Profit and loss account
To Each of the various expenses or losses
(This entry will close the expenses accounts)
2. Transferring all items of gains etc:
Various nominal accounts (representing gains)
To Profit and loss account
(This entry will close all the remaining nominal accounts)
Various nominal accounts (representing gains)
To Profit and loss account
(This entry will close all the remaining nominal accounts)
3. Transferring net gain to capital account:
Profit and loss account
To Capital account
(This entry closes the P & L account)
Profit and loss account
To Capital account
(This entry closes the P & L account)
4. Transferring net loss to capital account:
Capital account
To Profit and loss account
(This entry closes the P & L account)
Capital account
To Profit and loss account
(This entry closes the P & L account)
Profit and Loss Account in Statement Form/Income Statement:
Trading and profit and loss account/income statement may be prepared either in account form (T form) or in report form (statement form). Trading and profit and loss account in both the forms give the same information. The account or T form is traditional and is used widely but in recent years many business houses prefer to present the profit and loss account/income statement in the report form.Format of Profit and Loss Account/Income Statement in Statement Form:
Trading and Profit and Loss Account/Income Statement
For the year ended 31st December, 199-----
For the year ended 31st December, 199-----
Income From Sales: | |||
Sales | ------ | ||
Less: Sales returns | ------ | ||
Sales discount | ------ | ------ | |
Net Sales | ------ | ||
Cost of Goods Sold: | |||
Merchandise is stock on 1st January | ------ | ||
Purchases | ------ | ||
Less: Purchases returns | ------ | ||
Net purchases | ------ | ||
Cost of goods available for sale | ------ | ||
Less merchandise in stock on 31st December | ------ | ||
Cost of goods sold | ------ | ||
GROSS PROFIT | ------ | ||
Operating Expenses: | |||
Selling Expenses: | |||
Sales salaries | ------ | ||
Advertising expenses | ------ | ||
Insurance expense - selling | ------ | ||
Store supplies expenses | ------ | ||
Sundry selling expenses | ------ | ||
Total selling expenses | |||
------ | |||
General Expenses: | |||
Office salaries | ------ | ||
Taxes | ------ | ||
Insurance expenses general | ------ | ||
Office supplies expenses | ------ | ||
Sundry general expenses | ------ | ||
Total general expenses | ------ | ||
Total operating expenses | ------ | ||
Net profit from operations | ------ | ||
Other Income: | |||
Rent income | ------ | ||
Other Expenses: | |||
Interest expenses | ------ | ||
------ | |||
NET PROFIT | ------ | ||
Explanation of Certain Items of Income Statement:
Income from sales: The total of all charges to customers for goods sold, both for cash and on credit, is reported in this section. Sales returns and allowances and sales discounts are deducted from the gross amount to yield net sales.Cost of Goods Sold: Cost of goods sold refers to the cost price of goods which have been sold during a given period of time. In order to calculate the cost of goods sold we should deduct from the total cost of goods purchased the cost of goods at the end of the year. This can be explained with the help of following formula/equation:
(Opening stock + Cost of goods purchased) - Closing stock = Cost of goods sold |
Gross Profit: The excess of the net income from sales over the cost of goods sold is also called gross profit on sales, trading profit or gross margin. It is as gross because all other expenses for the period must be deducted from it to obtain the net profit or net income of the business.
Operating Expenses: The operating expenses also called operating costs of a business may be classified under any desired number of headings and sub-headings. In small retail business it is usually satisfactory to classify operating expenses as selling or general.
- Expenses that are incurred directly in connection with the sale of goods are known as selling expenses. selling expenses include salaries or the salesmen, store supplies used, depreciation of the store equipment, and advertising.
- Expenses incurred in the general administration of the business are known as administrative expenses or general expenses. Examples of general expenses are office salaries, depreciation of equipment, and office supplied used.
Other Income: Minor sources of income are classified as other income or non-operating income. In a merchandising business this category often include income from interest, rent, dividends and gains from the sale of fixed assets.
Other Expenses: Expenses that cannot be associated definitely with the operations are identified as other expenses or non-operating expenses. Interest expense that results
Publish Page
The two categories of non-operating items, other income and other expenses, are offset against each other on the profit and loss account. If the total of other income exceeds the total other expenses, the excess is added to net profit from operations; if the reverse is true, the difference is subtracted from net profit from operations.
Net Profit: The final figure on the profit and loss account is labeled as net profit (or net loss) or net profit carried to balance sheet. It is the net increase in capital from profit making activities.
