The Profit and Loss Statement

A Profit and Loss statement provides information about the profit performance of an organisation / business. The Profit and Loss statement summarizes the main forms of income and expenditure that have occurred in an accounting period.

partial illustration of profit and loss statement

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It is important to understand the concept that the Profit and Loss statement is a SUMMARY of all income and expenditure transactions. Businesses may encounter many thousands of transactions on day to day basis. It would be impossible to get a picture of the financial performance of the business by looking at individual transactions. It is necessary to group and summarize transactions of a similar type. This is one of the main tasks of the accounting process, and thereby accountants, to simplify and summarize thousands of transactions so that people can make sense of the information, and get a picture of how well the business is going.

The phrase "the bottom line" is often heard in relation to business. This phrase originates from the Profit and Loss Statement where the profit (or the loss) of the business is the last line on the document. Profit (or loss) is calculated by subtracting Total Expenses from Total Profit. If Income is greater than Expenses there is a Profit, but if Expenses are greater than Income, then a Loss arises.

The Profit and Loss statement is a financial report that is presented monthly at board and committee meetings, whereas the Balance Sheet is often only presented once a year. This is because income and expenditure will vary considerably from month to month. There is a need therefore to monitor this regularly in order to run a business with confidence. On the other hand, in non-profit organisations in particular, the values for assets and liabilities as shown on the Balance Sheet are more static.



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