Understanding Profit and Loss Statements

When running any type of business it is important to understand basic accounting methods as well as the associated accounting statements.  Perhaps one of the most important statements is profit and loss.  Without a firm understanding of this document, you will not be able to completely track the progress of your company.

The technical definition of a profit and loss statement is as follows:  a document that is created by a company that illustrates all income, expenses, and net profit.  This statement is then used to calculate net income by subtracting the total expenses from the total income.  A profit and loss statement depicts all transactions that take place over a particular period of time, such as a quarter or a year.

In order to get the most out of a profit and lost statement it is always a good idea to compare your current data to data that was collected for previous years.  This helps to give you an idea as to how your decisions are affecting the business as a whole.  You will be able to quickly see if you are making less money or more money, and if further changes need to be made.

A profit and loss statement can also be handy to present to other people who may have an interest in your business.  For example, you may need to present certain reports, such as this, to the bank in an effort to obtain funding.  The bank can then quickly look to see how well the business is doing, and make an assessment as to if the investment would be wise.  This document essentially informs the bank as to whether or not the business is profitable, as well as if the business has potential.

An ideal profit and loss statement should show a consistent amount of growth and a steady stream of income.  If the statement does not show this, or if the numbers do not appear to be headed in the right direction, a business owner many be faced with difficult choices.  The owner may decide to put off a planned expansion for the time being in order to better increase the bottom line.  The business owner may also look for areas to increase profits, such as reducing a product line that is not selling well, or cutting back on positions that may be costing too much to fund.

The profit and loss statement is an essential tool that can be used in a wide variety of ways.  From keeping tabs on the overall monetary health of a company, and predicting growth potential, to finding areas to cut overspending and reduce costs, this statement should be considered a lifeline for any type of business.

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