A profit and loss, also called a P&L, report is an important financial statement for every business. In summary profit and loss reports detail the company’s financial performance during any given period. It is a statement of the income and expenses, normally divided into categories, that when considered in conjunction with one another, explains how the company has fared and the extent to which it has been able to turn a profit. A P&L report typically covers a standard reporting period e.g. a quarter or a year, but effectively it can be set between any two dates to indicate financial performance in that period.
Gross profit, net profit and losses
A standard profit and loss report will provide an at-a-glance breakdown of income and expenditure, but this is usually sub divided by type, so a more granular level of interrogation and analysis can take place. For instance, the income may be broken down into categories to identify sales derived solely from the company’s own labour/product, those it buys in and marks-up and those upon which it merely receives a commission. Furthermore, bank interest and income received from non-trading activities will also be delineated. Set against this income will be the cost of sales i.e. the money spent to enable that product or service to be sold. This may be the cost price of stock items or the cost of brought in labour. Once deducted from the sales total, this generates the gross profit. All other costs incurred by the business are then removed. These are called the overheads and will include things like salaries, rent and business administration costs. Once these have been deducted from the gross profit you are left with the net profit figure, assuming there is money left, or the deficit figure if the company has turned a loss in that period.
Chart of Accounts Structure
The chart of accounts is the name given to the categorisation of revenue and costs. Within the overall ‘buckets’ of money in and money out, most businesses will want to track exactly where that money was earned/spent. Examples would be splitting out postage, mileage, rent, salaries and IT costs for instance. And in terms of revenues, as previously noted, these may be split to show the difference between bought in goods and those made in house. These categories do not affect the overall totals, but they do permit those reading the financial statements to identify patterns, trends and significant areas of cost and income by type. When each transaction is added to the accounts, it will be coded accordingly, creating individual lines of detail within a broader summary report.
A profit and loss report, or statement, is a key financial report and should be included in the regular management reporting for the business. Some organisations, due to their size or external reporting regulations, will be required to deliver a full management report every month, but for most quarterly, half yearly and annual iterations will provide them with the regularity of reporting required. A profit and loss report, because it reflects trading conditions, can readily be compared with previous periods to identify trends, patterns or changes in trading.