The Profit and Loss Statement, Meaning, Importance and Types

A profit and loss statement (P&L) or income statement is a financial report that provides a summary of a company’s revenues, expenses and profits/losses over a given period of time. It passes a message about your ability to generate sales, manage expenses and create profits. While preparing the statement, you need to take cognizance of the accounting principles that include revenue recognition, matching and accruals.

This statement is an indicator of the financial health of your company based on its ability to generate income through sales, manage expenses and sustain a healthy profit margin. You could also call this statement, earnings statement, operating statement, statement of operations and statement of financial performance. If you’re thinking of starting a business or seeking funding for your venture, you’re probably worried about all the bookkeeping involved. The good news is that it’s well worth the effort. Tracking and reporting a company’s financial health not only keeps you abreast of its fiscal performance but may also be useful for attracting investors or potential buyers. One of the most important documents for tracking your business’s success is known as a P&L statement.

Before we go into understanding, creating and using a P&L statement, there are two important terms you should be familiar with. One of them is the operating income; this is the income your company generates after all operating expenses are deducted. This is useful for understanding the overall strength of a company’s core operations. Net income, the second term is the income generated after additional, nonoperational expenses like taxes and interest on debt are deducted. It may also include any income you derive from interest on loans or the sale of assets like equipment etc.

Some may ask why preparing the P&L statement is so important, well the reason is not farfetched. This is because the statement aids the measurement of a business’s success which enables management to make informed decisions. With this statement, management can determine which of its activities or operations are generating a return o investment, which of the activities are bringing in losses, which of its operations to continue and which to discontinue.

This statement is one of the statements that companies are required by law to prepare. If your company is applying for a loan or if you are seeking funds from investors, you will need to present your P&L for proper evaluation. Investors and lenders will evaluate your net income and operating income and compare them with your expenses, debts and taxes to ensure your business is viable, worth providing financial assistance to and that the company has the potential and capability to generate sufficient funds to pay back the principal and interest at the agreed time.

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