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Business essentials: Profit & Loss Statement

The profit and loss statement, or P&L which is also sometimes called the income statement, covers the company’s revenue and expenses. This article gives you a background on the different elements of the P&L and how it relates to the Balance Sheet and the Cash Flow Statement.

The P&L can be divided in:

- Revenue section, also called Sales or Income

- Expenses section, also called Costs

- Taxes, being Corporation Tax or Income Tax

- Profit, which can be profit before tax and other specifics or after tax.

Revenue is all the income a business receives in selling its products or services. You can divide the revenue in separate revenue streams if you for instance sell different products or services. A bakery can sell for instance bread and cakes and would want to make visible which revenue both product ranges are bringing in.

Expenses can be described as the money a business spends to buy or manufacture the goods or services it sells to its customers (costs of goods sold) and the money spent on running the company that is not specifically related to a single product or service sold. An example of an expense account is rent, utilities, or salaries / wages.

The profit and loss statement is divided into separate revenue and expense accounts. It is the bookkeeper’s responsibility to record the transactions in the correct accounts. For example, if the business makes a cash sale to a customer and your business uses double-entry bookkeeping, you would record the cash received in the asset (balance sheet) account on your balance called Cash and the sale would be recorded in the revenue account on your Profit and Loss account called Sales. When you purchase for instance office supplies for your business, you would record this in your P&L as Office Supplies expense and the other side of the entry would go to Cash (if you paid cash), Bank (if you paid by bank) or Accounts Payables / Creditors when you pay later when the supplier sends you an invoice.

Example of a Profit and Loss Statement:

Below the revenue and the expenses, you will find the net profit before tax, or EBITDA (Earnings Before Interest Tax Depreciation and Amortisation). If like in the example above your Depreciation and Amortisation already has been deducted you can call it EBIT(Earnings Before Interest and Tax). After EBIT or EBITDA you can deduct the Corporation tax which you have to pay and you end up with your profit after tax or Net Profit.

For the relationship between the Profit & Loss, Balance Sheet and Cash Flow Statement, please go to the article related to the Balance Sheet.

If this is too complex or too time-consuming you might want to appoint a bookkeeper or accountant. FinanceWise can help you free of charge to find the right bookkeeper or accountant to meet your business needs. Based on the information you provide we find you a trusted accountant. All our accountants are specialised in preparing correct balance sheets and profit and loss accounts, so you know your day to day accounting or bookkeeping is in good hands. This way you can focus on building your business.

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