When you start a business or go self-employed it’s crucial that you wrap your head around all of the new lingo to do with accounts and tax.
One of the most important financial reports you’ll need to understand is the profit and loss account.
A profit and loss (P&L) account, also known as an income statement, is a financial statement that summarises a company’s revenues and expenses over a given period of time. This statement provides important information about a company’s financial performance and is used to assess its profitability.
The P&L account begins with a company’s total revenues, which are the income it generates from the sale of goods or services. These revenues are then reduced by the cost of goods sold (COGS), which is the direct cost associated with producing the goods or services. The resulting figure is the gross profit, which is the profit the company makes before accounting for other expenses.
Next, the P&L account takes into account the company’s operating expenses, such as salaries, rent, and utilities. These expenses are subtracted from the gross profit to calculate the operating profit, which is the profit the company makes from its core business activities.
After accounting for the operating expenses, the P&L account also considers any non-operating expenses, such as interest expense and losses from investments. These expenses are subtracted from the operating profit to arrive at the net profit, which is the company’s overall profit or loss for the period.
The P&L account provides valuable information to investors, creditors, and other stakeholders, as it allows them to evaluate a company’s financial performance and determine its ability to generate profits. It is also used by managers to identify areas where the company can improve its operations and increase its profitability.
In conclusion, the P&L account is a crucial financial statement that provides an overview of a company’s revenues, expenses, and profits. It is an important tool for assessing a company’s financial performance and making informed decisions about its future.
It’s also the report that your taxes are calculated from – so best to get to grips with it now.
And at Mazuma, we’re here to help you do just that!