Profit and Loss Statement – basic principle.
The company's profit and loss statement says to the company, whether it generates profit or loss. This means whether it has a positive or negative economic result, according to the rules of accrual principle.
It indicates to the company what has a revenue, cost, loss, or profit for a given time period – typically month, quarter, half year or year. And how does the profit and loss statement generate a profit picture? Starts with company revenues or total net sales (This is the same) for a given reference period. It also tracks all the various costs, including the cost of goods sold or services, company overheads, taxes, etc., and deducts these costs from revenues. And what remains is the profit or loss for the period.
Let's show it on a simple example: You are a budding entrepreneur and you decided to run your shop in a garage in front of a family house. Your goods will be office supplies, including school equipment. The target group of sales is local authorities, schools and regular clientele, which comes from the street.
For example, your profit and loss statement might look like this in a month:
A little closer, let's look at the individual items:
Cost of Goods Sold
This item says how much the company is costing the product that it subsequently sells. This includes both the cost of raw materials and the materials from which the product is produced, including the work, any other services associated with the product – cooperative costs, etc. cost directly bind to the product.
Thus, if we subtract the cost of goods sold from total sales, we get the so-called Gross profit, which shows how much the company has earned before paying other operating costs, taxes, etc.
You can use this number to calculate the Gross margin. Although this item does not appear in the report, it is very important. Simply divide the gross profit by total sales. In our example, it will be:
130 000/280 000 = 46%.
Operating Costs
This includes sales costs, administrative costs, advertising, rents, energy consumption, telephones, etc. Simply all costs supporting the sale and delivery process of goods to the customer.
Depreciation
Depreciation is the form by which the company's long-term assets (e.g. machines, computers, etc.) are reflected in the price of the product. If these devices have a "lifetime" for example, 5 years, their purchase price will not be reflected in the product once, but will be dissolved in products or services produced by the companies for the five years. If the accounting officer uses the so-called Simply straight-line depreciation, value of the asset will be decrease yearly by 1/5 of the total price.
Earnings Before Interest and Taxes - EBIT
We obtain the EBIT by deducting from gross profit the operational costs and depreciation.
Profit / Loss – Net Income
EBIT Subtract interest costs and taxes from EBIT and we have Net Income.
Well, that's all. Although the actual statement looks substantially more complex, principle is the same. You can quickly find out how your business is doing at any time.
