The measurement of success of a business lies on its ability to make profit. The more profit it is able to make, the more successful it is. Profitability of a company can be calculated using the profit and loss statement.
What's a Profit and Loss statement?
A company's profit and loss statement (P&L statement) is also known as an income statement. It summarises the company's income for a quarter or a year.
P&L statement along with balance sheet and cash flow statement will be issued quarterly and annually by every public company. Business owners, managers and investors use these financial report to have an insight on how well the company is operating. Particularly, they use the P&L statement to determine whether the company is earning profit or taking losses. The balance sheet, on the other hand, is used to show what a company oned and owed at a point of time.
P&L statement uses accrual accounting. Meaning, it counts revenue and expenses when they are incurred not when the money is actually exchanged. Revenues and expenses can be recorded in the P&L statement before cash actually changes hands. Therefore, it is important to compare the P&L statement with the cash flow statement to identify a company's cash position.
There's two types of P&L statement: A single-step P&L statement and multi-step P&L statement.
Single-step P&L statement
A single-step P&L statement is a simplified income statement (compared to multi-step P&L statement) which mainly illustrates the subtraction of expenses from the company's revenues. In such P&L statement, the heading will convey the critical information like the precise period of time that is being covered.
Multi-step P&L statement
A multi step P&L statement literally means involved multiple subtractions in its calculation. It separates operating revenues and expenses from nonoperating revenues and expenses, gains and losses. The multi-step P&L statement also illustrates the gross profit (net sales subtracting from the cost of goods sold).
In such P&L statement, you will notice that there will be many steps involved before arriving the bottom line of net income. With multiple steps shown, you can find detailed information about how the gross profits are calculated. Besides, such P&L statements will also state operating income which shows the profit earned from the company's primary activities of buying and selling merchandise.
How to measure success?
After knowing what is the P&L statement, we are back to the question, how do we use it to measure the success or profitability of a company?
In short, the P&L statement typically shows a company's revenue and the costs involved in generating the revenue (expenses). By studying the P&L statement, company owners and manager can identify places where spending can be reduced to increase profit.
The formula is as below:
Revenues - Expenses = Profit (if its a positive figure) / Loss (if its a negative figure).
P&L statement in TreezSoft
In TreezSoft cloud accounting, you can have access to your company's P&L statement at anytime. Our system will automatically update the report whenever you add or change any record in TreezSoft. You can easily generate the P&L statement at any date range you wanted by just a few clicks and still be sure that your report is up-to-date.
Other financial report like the balance sheet and cash flow statement is also automatically updated in our system and you can have the same quick access to them, helping you to stay on top of your company's finance.
TreezSoft is a cloud accounting software, it allows you to access your financial information anytime, anywhere. It also allows you to create unlimited users for FREE for your account in TreezSoft.
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