A profit and loss statement are simply one of the essential financial documents of a business and depicts the business’s revenues and expenses over a certain period of time. It can be prepared on a monthly, quarterly or annual basis, and is available in many formats. For businesses that have more than one segment of the operation, the statement can include information from each segment.
The profits are the difference between the revenues and costs over a period of time. The expenses include those expenses related to the production of goods or services sold by the business. The profit, however, refers to the difference between these two figures. Any positive figure indicates a profit, while any negative figure indicates a loss.
The profit statement is prepared on a month-to-month basis, and most often begins in January. For businesses with a month-to-month turnover rate of over fifty percent, it usually will be prepared before the end of December. However, if the turnover rate is less than fifty percent, the statement will be prepared for the first quarter of each year.
In addition to showing the income and expenses of a business, an income statement also shows the profit and loss. The profit is the profit made on sales of goods or services sold by the business. Losses are the revenue less the expenses incurred on sales of goods or services sold by the business.
For each category of sales, there are a corresponding profit and loss. There may be a single category, or there may be multiple categories, with one category representing all profits. If the category is comprised of all profits, then it is called the gross profit. However, if a single category of sales is shown as making no profits, it is called the gross loss.
When preparing the income statement, the gross profit must be divided by the total revenue, to get the profit. Then, the profit must be divided by the total cost of goods or services sold. Finally, the profit must be multiplied by the total number of sales. If the profit exceeds the total amount of revenue, then the profit is the difference between the revenue and the profit.
If the profit is greater than the revenue, then it is called gross income. If the profit is less than the revenue, then it is called net income. This is a good indication that the business has a higher than average level of profitability. Net income is then subtracted from gross income to show the difference between what the business brought in and what it spent on its operation. For a business with a high operating profit margin, net income will be greater than the gross income, so that there will be more money left in the business to go back to shareholders, instead of going to investors.
Because this financial document is a record of what a business actually earned, the data on it is typically kept in books and circulated among all employees, as well as to all financial reporting agencies. Because the data on the statement is usually very detailed, even a person without a business background can prepare the statement. A simple hand written statement can contain the basic information about a business, such as the names of all employees, their addresses, and the total number of months the business has been in operation.
Income statements may also be prepared manually by an individual. However, the data on it will not be quite as accurate. The person who prepares the statements needs to be very careful to make sure that all data entered into the computer is correct.
In order to prepare an income statement, an accountant must determine whether or not the business is actually making enough money to pay off its debts and pay for its expenses. By assessing the business’s profit and loss account, the accountant can figure out if the business is making enough money to pay off its debts, or if it is losing too much money to pay off its debts. At this point, the accountant can make any necessary adjustments to the balance sheet, such as selling of assets or reducing the amount of debt. to make the business more profitable.
An accountant can prepare an income statement in several ways. A typical business may use one form or the other. They can either prepare the statement on its own, buy the form from the accounting department of the company where the business is maintained, or they may hire an outside accountant to do the preparation for them. In any event, the accountant must ensure that all information is correct.