The profit and loss (P&L) statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period, usually a fiscal quarter or year. Depending on the business or geographic location, some refer to a P&L statement as an income statement, statement of operations, statement of financial results, earning statement or an expense statement.
Profit and Loss statements are prepared based on accounting principles such as revenue recognition, matching and accrual, which make it different from the cash flow statement.
One important thing to know before analyzing or reviewing your P&L statement is whether the business/organizations use a cash basis accounting or accrual basis of accounting which can potentially alter net income significantly.
The cash basis accounting recognizes revenues when cash is received rather than earned, and expenses when they are actually paid not when accrued. This means this method does not recognize accounts receivable or accounts payable. This method is used in a company who records their payments for a project when their customer hand over the cash even if the project is not complete. For more information about Cash basis accounting, you can use the link below.
https://www.investopedia.com/terms/c/cashbasis.asp
The accounting method under which revenues and expenses are recognized on the income statement when they are earned (rather than when the cash is received). For example, we would record revenue when a project is complete, rather than when we get paid. This method is more commonly used than the cash method. For more information about accrual basis accounting, you can use the link below.
Now that we know what a P&L is so, let’s see how to analyze it? Let’s start with a simple example:
The income statement or P&L statement is quite similar to the cash-flow statement which shows changes in accounts over a specific period. Below we will see an example of a simple profit and loss statement.
Reviewing the P&L Statement is crucial in measuring the financial efficiency of a company, in terms of cost control performance and revenue earned. It also gives net income, which shows how well the entity is doing in a specific period. Moreover, it is extremely helpful to compare P&L statements from different accounting periods. The changes in revenues, operating costs and net earnings are important numbers that help business owners identify the financial health of their company and what aspects of their operations should be kept or modified to improve overall business performance.
HTH & Associates help organizations and business owners with accounting and/or financial consulting services.
For Help Reviewing your organization’s Profit & Loss Statement, contact us at accounting@thaddeus.org or call us at 909-599-2111.
Thank you for reading.
Sapna Agnihotri
