According to an article in Entrepreneur, all profit and loss statements, also known as income statements, are based on a simple, common sense formula: sales minus costs equals profit.
“Profit and loss statements are like a movie,” since its various characteristics take place over a period of time, just like the plot of the movie unfolds during the show, says Knolls. Conversely, a balance sheet is a “financial snapshot of a business,” he says. According to Knolls, a balance sheet is comprised of a business’s assets, liabilities and the owner’s equity in the entity.
Sales are generally listed at the bottom of a P&L, with costs displayed below them and profits shown at the bottom.
Profit and loss statements are integral to understanding the financial health of a business because they “help identify problems, like if a company isn’t generating sales, or spending too much money (on advertising, for example) while not earning sufficient ROI. A profit and loss statement helps with problem solving by helping identify reasons a business may or may not be succeeding,” explains Knolls.
Profit and loss terms to know include:
- Income statement: Another name for Profit and Loss statement. It is one of the three financial statements every public company issues quarterly and annually along with the
- Balance sheet: A snapshot, showing what a business owns and owes at any single moment; and
- Cash flow statement: In financial accounting, a cash flow statement is also known as a statement of cash flows. It is a financial statement showing how changes in balance sheet accounts and income affect cash and cash equivalents. It also breaks the analysis further into operating, investing and financing activities.
Knolls advises business owners to review their company’s P&L documents quarterly, at a minimum. That way, “you can ensure that expenses are not exceeding revenues,” he says, adding a P&L statement documents the health of a company by “identifying unnecessary and excessive spending.”
Tami Kamin Meyer is an Ohio attorney and writer. She tweets as @girlwithapen.
