Statement of profit and loss – The financial statements are the end products of the accounting process. They are prepared following the consistent accounting concepts, principles, procedures and also the legal environment in which the business organizations operate. These statements are the outcome of the summarizing process of accounting and are, therefore, the sources of information on the basis of which conclusions are drawn about the profitability and the financial position of a company. Hence, they need to be arranged in a proper form with suitable contents so that the shareholders and other users of financial statements can easily understand and use them in their economic decisions in a meaningful way.
Statement of Profit and Loss represents revenue, expenses and financial result of a business entity. Therefore it summarises incomes, expenses, and profit/losses. For over a given period of time typically, a month, a quarter or fiscal year.
Similarly, there are two steps to know the profit/loss. It meant, the preparation of :
a. Trading Account
b. Profit & Loss Account
The trading account reflects the gross profit or loss of the business. Profit & Loss Account shows the net profit or loss earned by the company.
After the calculation of gross profit from the trading account, the gross profit will get carried forward to the P&L Account.
P&L Account takes all the indirect incomes and expenses into consideration.
Furthermore, all of the indirect incomes will get credited and the indirect expenses will get debited to the P&L Account.
After the adjustment of the above, we will arrive at the Net Profit which will get transferred to the Balance Sheet under the head Shareholders fund of the liabilities
Indirect Expenses –
Statement of profit and loss – The expenses which are not directly related to the principal course/activity of the business are termed to be Indirect Expenses. Indirect costs include costs which are frequently referred to as overhead expenses (for example, rent and utilities) and general and administrative expenses (for example, officers salaries, accounting department costs, and personnel department costs).
Indirect Incomes –
Similarly, these are the incomes which are earned by the non-business activities. Or, the incomes which earned not in the ordinary course of the business (i.e, irregular) are known as indirect incomes.
Ex: Receiving interest, Receiving discount, Profit on the sale of assets
Analysis of Profit and Loss Statement (P&L)
Statement of profit and loss – One of the main jobs of a financial analyst is to analyze the P&L of a company in order to make recommendations about the financial strength of the company or attractiveness of investing in it or even acquiring the entire business.
Examples of P&L statement analysis include:
- Comparing year-over-year numbers (horizontal analysis)
- Similarly looking at margins: gross profit margin, EBITDA Margin, operating margin, net profit margin
- Trend analysis
- Therefore rates of return: return on equity (ROE), return on assets (ROA)
- Valuation metrics: EV/EBITDA, P/E ratio, etc