|The profit and loss statement represents the flow of business activity for a particular accounting period, for example a month, a quarter, or a year. This flow of business activity is categorized into revenue and expenses, which determines net income.|
Now Showing: The Profit and Loss Statement
|Accountants compare the profit and loss statement to a “movie” because it shows the flow of business activity for an entire period (e.g. a month, a quarter, or a year). Accountants compare the balance sheet, on the other hand, to a picture of the company, or “snapshot” in time because it shows the resources of the company as of a certain date, for example January 31, 2012.|
The profit and loss statement is also called the income statement or the earnings statement. The profit and loss statement is mainly known for getting to the bottom line: net income. But it also provides a valuable source for measuring different levels of income, spotting trends, understanding the strengths and potential weak spots of your business, and measuring the efficiency of operations.
Sample Income Statement
Sunny Sunglasses Shop produced the below profit and loss statement for the accounting period of 2012.
Sunny Sunglasses Shop
Profit and Loss Statement
For the Year Ending
December 31, 2012
From this sample income statement we can see the flow of business activity for one year with the bottom line result or net income.
The result of all operations after revenues and expenses is a net profit of $15,283. This is profit that directly builds the value, or equity, of the business! See why with accounting formulas here.
Financial Statement Analysis and the Business Financial Statements
The company is off to a good start. But net income does not necessarily translate into cash flow under the accrual accounting method since sales and income on credit do not represent actual cash flow for the period.
It is therefore essential that other aspects of the business, such as debt management and cash flow, remain healthy with net profits.
Each of the financial statements should be used together to provide information for all these aspects of the business.
Financial Statement Analysis and the Profit and Loss Statement
Notice that the income statement format separates profit into three areas: gross profit, net operating income, and net income.