How to read a Profit and Loss Statement

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February 25, 2013
Financial reportsWhat is a profit and loss statement? A profit and loss statement helps to determine the financial performance of a business on a monthly, quarterly or annual basis. It helps to keep a track of all expenditure incurred and income earned in the business.

One of the things that a profit and loss statement can do is to compare the current year’s income and expenditure to that of the previous year. This clearly shows the past performances of the particular business in relation to the current year, and how it is doing now.

Are Profit and Loss statements useful?

A profit loss statement analyses the income for a specific period and subtracts the expenses incurred for the same period to calculate the profit or loss for the business.

The area called Sales in the balance sheet of a profit and loss statement lists each particular customer and how much they paid into the business in revenue.

In order to operate the business, there is a list of expenditures in the business known as Operating Expenses which includes wages, the products/raw materials that it has to buy in order to conduct business, and any shipping expenses.

The total amount the business profits during a specific time can be termed the Net Profit. The profit earned or the loss incurred can determine if the business is performing well or not.

Depreciation exists mainly for the tax purposes and it is used to show the overall value of the business in its current sale as the businesses must show the diminishing value of the equipment and supplies.

There may be other income and expenses that are usually the payments in and out of the business during the day to day period of time including the buying and selling of property or interest earned.

Benefits of Profit and Loss statement
  • It helps you to know how much income you are earning and the profit you are making
  • Helps to compare your projected performance to your actual performance
  • Compares your performance with industrial benchmarks
  • Past performance tends to form reasonable forecasts for the future
  • It shows your business growth and financial health over a period of time
  • Detects any problem regarding sales, margin and expenses within a reasonable time
  • Provides proof of income in case one need loans or mortgage; and
  • Calculates your final income and expenses when completing and submitting your tax return
Entrepreneurial Learning

The profit and loss statement is the most important statement to any business. It is the document which determines the performance of the company in terms of finances. It is through this that the owners of the company find out if they are incurring a loss or making a profit. This statement is very helpful as it sets a sort of benchmark for you better your performance.

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