Income Statement – Users and Classification

We have already established the fact that the P&L statement is a statement that shows the revenues generated, the cost incurred and the profit or loss for the period under review. The Income Statement, however, is amongst the documents to be filed with the Securities Exchange Commission as required by the Law. We cannot talk about the P& L statement without looking at the users of the financial statement and they include the employees, the employes, the regulators, tax officials, management staffs, government officials, potential and actual investors, bank etc. In this write up, we will specify and explain why each of these users need to see and review a company bank statement.

The shareholders of a company need the financial statement to assess the financial strength and profitability of the company. The debenture holders assess the short term and long term solvency position of the company, they need to be sure that the company can pay the interest and the principal. The creditors of the company, that is suppliers of goods and services needs to be reassured that the will receive full payment form the company as at when due. Banks are interested In the short term and long term solvency position and the financial strength of the company. The banks are also interested in the short term and long term solvency and the profitability of the entity. The potential investors wants to know the future prospects and financial strength of the company. Trade Unions and employees are interested in the profitability and going concern of the company. Customers are interested in the financial strength of the company.

Managers are reviews the financial statements to know the true position of the company and the future prospects  in order to make decisions for the future. The Stock Exchange Market wants to the prospects and performance of listed companies with a view to protecting the interests of the investors. The tax authorities are interested in the profits generated by the company while the government in the industry the company’s is operating also wants to see these statements.

I will like to add that although the balance sheet is also part of the statement to be filed, it cannot be substituted for the Profit and Loss Statement. While the balance sheet shows the financial position of a company as at a particular date, the Profit & Loss Statement shows the income, expenditures and profitability of the company over a period of time. The balance sheet provides a snapshot of its assets and liabilities on a certain date. The Profit and Loss Statement could be prepared quarterly, monthly, annually etc.

If you create and analyze your P&L statement regularly, you will better understand the performance of the business, which expenses are generating income and which are deeping in the profits of the company. Knowing where you stand through accurate P& L reporting can mean the difference between success and failure for any small business.

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