By: Myracle Stevenson
P & L
A profit and loss statement is often known as an income statement. It talks about the costs, expenses and the total revenue during a particular period of the year. It is a report which is based upon the financial analysis, discussing the overall profits and losses of a company. It also reflects upon a company’s potential to develop its sales. Generating profits and administering expenses is a part of income statements. It is made considering the principles of accounts, which are an integral part of preparing it.
Accounting Principles:
Three basic accounting principles are required to generate a profit and loss statement. It includes the revenue recognition principle, which mentions about the time it takes revenue to be recorded in the financial statements. The matching principle is another one that tells what revenues and expenses should be reported at the same time. The last principle is the accrual principle which focuses upon the fact that transactions are supposed to be recorded at the same time duration when they take place. This is against the idea of recording transactions when the amount is received.
Composition Of Profit And Loss Statement:
The structure of a profit and loss statement is constructed upon a few important elements. Its composition primarily includes revenue or total sales. Sales revenue is the amount received by a company when goods are sold and services have been provided. It can include both cash and credit. This makes up the top line of the statement. Other than revenue, there is a total cost of goods sold which is the production cost of goods and services. It includes labor cost and material cost. Also, it increases proportionally with revenue. Marketing and advertising, technology, selling, general and administrative are a few other categories to be included in an income statement. Expenses such as operating expenses, tax expenses, and interest expenses are supposed to be included as well. Net income is what is meant to be the bottom line of this profit and loss statement. It tells how much profit a company earns.
Balance Sheet:
A balance sheet is a part of one of the three financial statements. It reflects the financial position of the company or tells about its net worth. A balance sheet is composed of the total assets of the company, whether they are the current or non-current assets. Assets assess a company’s capability of generating future revenues and can provide future economic benefit. Another part of a balance sheet tells how these assets are subsidized, which is mainly through liabilities and equities. Equity is what is left over by deducting liabilities from assets. The liabilities include both current and non-current ones, whereas the equity includes Share capital and Retained earnings. Liabilities of a company are a measure of the future obligations a company has to go along and meet.
Conclusion:
Hence, profit and loss statements, along with the balance sheet are both fundamental parts of financial statements. They provide a clear and detailed look at the company’s financial performance.