Profit Loss Statement Basics

A profit loss statement is one of the basic, yet most important business accounting forms. It's very important to understand the basics of the profit and loss statement (also called a P&L statement or an income statement), because it gives a very accurate snapshot of your business for a given time, which helps show the strengths and weaknesses of your business.

• The P&L statement compares revenues with costs, and answers a lot of fiscal questions about the business. Revenue can come from sales and/or services, but it can also come from other areas, such as selling used equipment or receiving a loan or loan payment from another entity.
• Costs can come from many different areas, too, from buying equipment for the business, to buying products the business uses in manufacture or to sell. They can also come from payments to other businesses, employees, and in the everyday actions of the business, such as utility payments, rent or lease, etc.
• Essentially, the profit loss statement adds up the income, and compares it with the costs. For a simple small business, the P/L statement can be quite easy. For example, a small businessman owns a hot dog cart. During one month, he takes in $2,000 in hot dog and related sales. His costs included food and beverage of $400, napkins, forks, and other supplies, $300, maintenance, $150, utilities $150, and misc. expenses $100. That's a total of $1,100 in expenses, resulting in a net profit of $900. Of course, most PL statements are much more complicated than that, but that is representative of a basic P&L statement.
• On viewing this example, it is easy to see how important accurate profit loss statements can be to a business. Comparing P&Ls over time can give a very accurate portrayal of how successful a business is financially, and where it needs to improve. Comparing costs can show where a business may be spending too much money, and where it is saving money by spending wisely.
• Further detailed analysis can show if a business slows down or picks up during certain seasons, what advertising was the most effective on sales, and whether production costs have risen or gone down. That is why the profit and loss statement is so important to every business, large or small. It shows analysts just about every aspect of the business, so they can alter what they need to in order to make it even more profitable and successful.

The profit loss statement is one of the most important fiscal documents for any business, so it's essential to understand how to interpret it, and to make sure it's prepared correctly.