A company's profit and loss statement shows how much a company earned or lost over a given period. It is up to a small business owner to determine how much detail she wants to include in a profit and loss statement, also called an income statement. However, because the income statement is used for planning and forecasting purposes, best practices require that you include enough detail in the report so that you can track key income and expense line items.
Profit and Loss Statement
A company's profit and loss statement receives a lot of attention from company managers, investors, lenders and other stakeholder's because it tracks profitability. All else being equal, a company with a higher profit has a greater flexibility to pay debt, expand operations or make acquisitions. The standard format for the profit and loss statement is to list sales as the first line item and deduct all operating expenses and income taxes to arrive at profit or net income.
Video of the Day
Detailed Profit and Loss Statement
A detailed profit and loss statement provides a line item for every variable that affects profit rather than combining income and expense items. For example, a company has a choice to list its operating expenses as $210,000 or split out the individual line items that detail those expenses. From the perspective of outsiders, more detail equals greater transparency. Investors and lenders tend to view a company favorably if it provides more financial details. From the perspective of the company, having a detailed profit and loss statement allows management to identify trends.
Assume a company earned an annual profit of $92,460. Its profit and loss statement reads as follows: sales of $424,750, cost of goods sold of $213,750; operating expenses of $77,000 and income taxes of $41,540. The prior year, the company reported operating expenses as $42,100. The current year saw an increase of 83 percent. Without providing detail of its operating expenses, the company has no way of knowing which operating expense items caused the dramatic increase by just looking at the profit and loss statement. However, by listing out operating expenses separately such as $44,000 for salaries, $12,000 for rent, $8,000 for utilities, $10,000 for depreciation and $3,000 for advertising and promotion, the company can compare individual line items from the previous year to identify which expense caused total operating expenses to rise dramatically.
How much detail a company displays in its profit and loss statement is a business decision. Large, complex organizations have detailed profit and loss statements, particularly those of publicly traded companies. Small, privately held or less complicated companies do not have such requirements and are not bound by federal regulations. What matters most is that management understands the key drivers to profitability. Internally, the company may produce a less detailed profit and loss statement. However, for outside investors and lenders, a company should provide more financial disclosure.