Profit And Loss Account

Profit and loss account (British English) or Income statement (American English) is a standard financial document that summarizes a company’s revenues and expenses over a specific period of time, usually one quarter of a fiscal year and the entire fiscal year. The document tells us whether a business is actually making a profit or not. The main condition for this is maintaining accurate records of all the money that comes into and goes out of the company. After comparing these two figures, the profit (or loss) is calculated, which can then be used for judging how well the business is doing compared to its past performance and other businesses. All this is possible only if the information presented in the accounts is reliable. Because there are ways to manipulate accounts to create a good impression for the outside world, it takes a good accountant to prevent incorrect presentation of a company’s financial picture. In short, there are four measures of profitability which are shown at four critical stages in a company’s operations – gross, operating, pretax and after tax income, profit, revenue or earnings (all these terms are here used interchangeably). The reason for presenting so many different types of profit is simply because companies can use various techniques to avoid and/or minimize taxes that affect their reported income. Because these actions are not a part of a company’s business operations, pretax income can prove to be a more accurate measure of corporate profitability.

Net Sales (also: sales, revenues, turnover) refer to the value of a company’s sales of goods and services to its customers. Cost of Sales (also: cost of goods sold (COGS), cost of services). For a manufacturer, cost of sales is the expense incurred for raw materials, labor and manufacturing overhead used in the production of goods. For wholesalers and retailers, the cost of sales is the purchase cost of merchandise used for resale. For service-related businesses, cost of sales represents the cost of services rendered. While it may be stated separately, depreciation expense belongs in the cost of sales. Gross Income or Gross Profit or Margin represents the difference between net sales and the cost of sales. The greater and more stable a company’s gross margin, the greater potential there is for positive bottom line (net income) results.

Operating Expenses or Selling, General and Administrative Expenses (SG&A) include a company’s salaries, sales and marketing expenses, rent, utilities and other overhead costs. Since management is said to have the most influence over managing expenses, this category indicates their efficiency.

Subtracting SG&A from a company’s gross profit produces Operating Income or Operating Profit. This figure represents a company’s earnings from its normal operations before any so-called non-operating income and/or costs such as interest expense, taxes and special items.

Special or Extraordinary Items are amounts unlikely to be repeated e.g. capital gains received from the sale of assets or the cost of any one-time or unusual expenses, for instance, restructuring the business or after a fire.

Net Income (also: net profit or net earnings) is what the company has been left with after subtracting all its expenses from its total revenue. A negative difference is a loss and is shown in brackets. After the payment of dividends, if any, net income becomes part of a company’s equity as retained earnings.