The profit and loss statement is one of the most important documents that a business should have within the entirety of its operations. Also known as an income statement, it reflects the revenues of a company within a specified time period as well as its expenses to continue and support operations. A profit and loss statement is a document that shows the revenues that a business is getting, as well as the various expense statements that the business has spent for a specific period of time.
A profit and loss statement or income statement is essential in every business since it allows investors to see whether a business is earning and not losing money that will affect the operations of the business. An income statement is one of the documents that are used by investors before they invest in a particular company.Since it is only one of the financial statements of the business, there is some financial information that may not be fully discussed in this document.
Profit and Loss Statement Template
Sample Profit & Loss Statement Template
Mainly, it focuses on the transformation of the business revenues to net income. A profit and loss statement is beneficial to the functions of the company’s managers and to the interests of the company’s investors. In this article, you will be able to read about the importance of a profit and loss statement in business and the methods on how to prepare your profit and loss statement. You will also be able to download a profit and loss statement template if you need help in formatting your document.
How a Profit and Loss Statement Is Used in Business
The usage of a profit and loss statement has already been deemed necessary by businesses in different fields of expertise. No matter what industry a business is within, it will always be handy if they have a profit and loss statement forms available either for presentation or review. Some of the reasons why having a profit and loss statement are important are as follows:
- Just like the cash flow statement, a profit and loss statement can showcase the financial movement and condition of the business within a particular time period. This is the reason why there are scopes and limitations that are needed to be considered when making this document.
- Since a profit and loss statement contains financial information, it can be used to ensure that the business is following legal regulations. The usage of this document varies from the state or the country where the business is located. It is of utmost importance for P&L statements to be audited to ensure that all the details are accurate and updated.
- A profit and loss statement can be used as a reference when there is a need for the comparison of the business operations’ performance in varying time periods. The details presented in this document can actually represent the market movement based on how the offerings of the business have been perceived, the allocation of the business resources, and the balance between the needs of the business and its customers/clients.Through this, proper financial statement research can be implemented.
Methods of Profit and Loss Statement Preparation
There are two major methods that are used by businesses when preparing an income statement inclusion. It will depend on the jurisdiction of the management on what method to use. This decision will vary on the following:
- The nature of the business operations
- The level of comfort of the human resource personnel/officer when it comes to using a particular method
- The weight or the mass of the data that is expected to be placed in the statement
Going back to the methods that are used in preparing a profit and loss statement sample, they are as follows:
Single Step Income Statement
This method takes the simpler and faster process when preparing a profit and loss statement. It sums up the business revenues first to get the initial data necessary for presentation. Once the revenues have already been calculated, then the expenses of the business are subtracted from it to get the company’s net income.
Multi-Step Income Statement
When compared to the single step simple income statement, this method is more tedious as it needs to follow an organized and predetermined procedure to get the net income of the business. This process starts with the precise identification of the gross income of the business within a specified time period. After this, the total amount of the expenses of the business for its continuing operations and maintenance is then calculated. The result of the subtraction of the latter to the gross income of the business then results to the actual income of the business.
However, this process does not end in this step. The difference present within the revenues of the business from other sources/resources to its extra/additional expenses is then added to the operating income. The taxes that are needed to be paid by the business is then deducted to the income of the operations, which can then identify the company’s net income within the period within the scope and range of a specific profit and loss statement.
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