Every business whether it is small or big needs to prepare financial statements for balancing and determining the actual position of business. Profit and loss account, which we also called income statement, even all the profit transactions is recorded in the debit side of income statement and loss transaction is recorded in credit side of income statement. It is known by its name that it shows our actual income at the end of the financial year.This statement represents the revenue and expenditure incurred in business and transfers them into a profit and loss account(income statement) for a specific period of time.
We still need accurate financial record statements when we take a loan from a financial institution or lender or other loan providers. In these also every transaction is recorded so that it can be summarized in the last so how will the company declare its income without analyzing profit and loss. With the same income, they provides salary to their employees even they take out their own salary from the same income. There is only one purpose of this statement that it tells whether the business is gained or loss.
To prepare financial statements, creditors, investors, market analysers calculate the company’s financial position and need requirements in business for future growth.
Some basic components of Income statements
- Cost of goods sold
- Gross profit
- Selling general and administrative expenses
- Depreciation expenses
- Operating profit
- Interest expenses
- Net profit
- Earning before interest tax and depreciation
- Cost of raw materials
- Overhead cost
In all over words, it shows the company’s sales and expenses over a specific time period and includes some important information like short-term or long-term debt.
Profit and loss statement shows first our business revenue and expenses. In which revenue is the cost of net income from sale of goods or services of a company’s financial operations and from this, all the expenses are deducted for the business. Every company prepares the cash flow statement for each entry of how much money is coming and how much it is used for, so profit and loss statements prepare for the company’s future and present fitness.
If you want to prepare profit and loss account without doing any silly mistakes or if you don’t know how to prepare this, so you can use accounting software such as QuickBooks software, fresh books, Xero and so many other accounting software are available on the internet in which you can prepare any financial records such as profit and loss account, bookkeeping by just signing up. Some software is free as well as paid. These software helps you to prepare and estimate your Profit and Loss statement, you just make or give right transactions.
Profit and loss statements only present a company’s expenses, cost, revenue as a profit and all the things required covered in the statement for deciding business actual position and performance at the specific time period. With a well- prepared profit and loss statement, company’s can never be in doubt and make proper decisions and contributions of income between owners, distribution of salary between employees according to their estimation because we cannot understand it well until we have a proper and accurate record of the financial statement.
Other reasons to prepare profit and loss statement
This statement is not only done for the future growth of the company rather it has many more reasons such as the company has filled with many financial members like investors, publishers, accountants,financial advisors, and so on. So these financial members contribution towards company must. Without these members, even owners cannot understand the company’s financial position with consulting them and without preparing profit and loss account. These financial members are known as professionals of the company who prepare a profit and loss account, keeping their own profession record because the company cannot prepare profit and loss statements without any one of them. These financial members improve the strength of the company by comparing with the other same industry in the same field and take judgement and would have known that in which field financial requirements are needed. So according to judgement, they make decisions for future prospects.
After judging everything about the company with other companies, they used to decide whether they needed to take their risk now or not. In simple words, they(investors, owners, accountants, publishers) take risk according to their financial improvements.
Loans from financial institutions
After judging everything about the company, they decide to take loans from financial institutions or banks and other loan or money providers and lenders according to their company requirements. Even all the transactions of loans must be recorded in the financial record for future conditions.
Types of Profit and Loss Statement
There are two types of profit and loss statements that are prepared according to the company’s needs.
- Periodic profit and loss account: Every owner needs to prepare a profit and loss account with right information about business for future deciding net income and make commercial decisions, financial decisions and also submit tax by using the related information from profit and loss accounts.
- Pro Forma Profit and Loss: If you are starting a new business whether it is small or big so you have to set up and create or make a profit and loss account so this account is created pro forma and this Pro Forma will need in the future for applying loans, funds from lenders for new startup.
Things required in prepare this statement
There is much information that is necessary in this statement from the first month of the business such as cash flow budget, calculations of depreciation, transaction of purchase and sales happening in business made with credit as well as cash, also include cash transactions with receipts of payments and sales. Also need to include all bank transactions for preparing P&L accounts to estimate net income. Also have all information about discounts on sale or purchase.
So this income statement shows periodically according to their given information of the company.