To check the financial status of the company, the three most crucial financial statements are prepared, i.e. P&L statement, cash flow statement, and balance sheet. To know everything about profit and loss statements and how they can help you know the financial health of your company, read this blog.
Overview of Profit and Loss Statement or Income Statement
An income statement or profit and loss statement is an essential document that summarises the expense and income of a business during a specific time period. Mostly, publicly traded companies release this statement for every quarter of a financial year. For businesses, creating an income statement each quarter or each month will show how you are doing. By opting for bookkeeping services in Australia, you can ask a bookkeeper to prepare an income statement for your company.
The information on this statement helps you know whether you can or can’t make profits by minimising costs, maximising revenue or doing both. A few other names of this statement are earnings statement, statement of operations, income statement, expense statement, and profit and loss statement. To get detailed information regarding the profit and loss of your company, you can choose bookkeeping for small businesses.
Why is an Income Statement Important?
Profit and loss statements are essential because they help measure the success of a business, allowing business owners to make informed decisions. With an income statement, business owners can determine which activities are producing a return on investment and which are losing money, and then make the right decision.
• Identify business’s profitability
The profit and loss statement helps management to determine whether your business is making money or not. It is suggested to prepare an income statement that includes your gross revenue and subtract your total expense to check the net income of your company. Before concluding anything, it is important to consider all the overheads and income of your business.
• Tax Preparation
Tax preparation is another vital aspect in which profit and loss statements are helpful. While tax season often makes business owners feel stressed, maintaining detailed reports can help avoid a financial mess when it is a matter of accounting and business books. You can ask a tax return accountant to prepare and lodge a tax return on your behalf.
• Financial status of the company
P&L statements can be useful in assessing a company’s financial standing. For instance, internal analysis utilising profit and loss statements can be advantageous for both small and large businesses. Additionally, some assessments determine if a corporation has achieved its financial objectives over time by comparing sales expense data to earlier budget data.
• Identify and resolve errors using financial statements
Accurate financial accounts are essential for identifying costly errors, improper company practices, and even illegal activities. This can be resolved by looking for disparities while performing bank reconciliation.
Components of a Profit and Loss Statement
Total income, which is the gross revenue for a business during a specific time period, is often the first item to appear on a P&L statement. If a company has many sites, this could be broken down by location.
The total cost of goods sold (COGS), which is deducted from revenue to calculate operating income, is the following item often included in a P&L statement. Inventory, payroll and salaries, professional fees, and other costs essential to running your firm can all be included in the COGS, or operating expenses. On the P&L statement, these are often itemised.
After calculating the operating income, any nonoperating expenses like interest on loans or taxes are subtracted to arrive at the net income or net profit. These expenses are separated on the Profit & Loss statement to differentiate them from expenses related to sales and revenue. This also helps in calculating tax deductions conveniently.
Although a P&L is typically prepared during tax season, it can also be utilised to inform the business owner, employees, and shareholders about the company’s performance. Additionally, it can be used to secure funding or serve as proof of income in case of a business sale.
As you can see, there are many reasons to prepare a profit and loss statement for your business. By maintaining accurate financial statements, you can make the right decisions for your company while monitoring the progress of your company. Get your financial statements ready by seeking help from a Reliable Bookkeeping Services provider.