Profit and loss account: what it is, its relevance and structure

What is a profit and loss account?

According to the General Accounting Plan, the profit and loss account (P&L), also known as the income statement for the year, is one of the annual accounts that you must submit to the  Tax Agency .

It simply reflects the income, costs and expenses incurred by a business during a specific period. In Spain, it must be submitted every year, although it can also be done every three months.

What is the purpose of the profit and loss account?

This financial report is used to perform specialized analysis on your company, so that you have the necessary information to make sound long-term management decisions.

Basically, the P&L statement shows what your profits or losses are from your economic activity. This way, you can evaluate the profitability of the business and identify the areas in which you can improve your efficiency in the short, medium and long term.

Other functions of the profit and loss account would be:

• Trend analysis : Performing this report allows us to discover trends in how we invest money and which actions generate the most benefits in the future. This also applies to expenses.
• Investments : The profit and loss account allows investors to evaluate the profitability of the business before making a financial contribution. Based on the results of the report, the investor determines how long it will take to recover his investment.
• Lending : Something similar happens with creditors or lenders, whether independent organizations or banks. They evaluate how profitable it will be to lend money or resources based on the balance sheet of the income statement.
• Transparency : Presenting a P&L statement helps increase your company’s credibility and ensures that all its activities are legal and transparent.
• Basis for tax calculation : finally, it also allows you to comply with the laws and the General Accounting Plan .

Difference between a profit and loss account and other financial statements

Within the list of financial statements we can find some such as the balance sheet or the cash flow statement. Both, together with the profit and loss account for the year, are used for decision-making in the company, although they all have their differences.

A balance sheet shows you your net worth, as well as your assets and liabilities, highlighting that it can be generated at any time and not just annually. The cash flow statement, on the other hand, focuses on the movement  south africa email list of money within the company, that is, it helps you know how much money comes in, goes out and why.

Structure of the profit and loss account

Let’s now look at what the structure of a P&L statement should be, that is, everything key strategies for success in b2b marketing that the financial report must include. In this regard, you should know the following:

• Revenue : This is the profit earned by the company and is divided  whatsapp number into operating and non-operating. Operating income is all income generated by the company’s main economic activity, while non-operating income comes from secondary activities such as interest earned, sales and asset income, among others.
• Cost of sales : this includes everything that has to be invested in the production of a good or service. This includes the purchase of raw materials, payment of labor, etc.
• Operating expenses : In addition to having expenses related to production, there are also expenses related to the company’s operations, that is, employee salaries, rent, supplies, marketing and advertising, etc.
• Financial expenses : These are the expenses that the company has that are related to obtaining and using funds by having to pay loans, interest or bank fees.
• Other income and expenses : Also called extraordinary results, are some income or expenses that are incurred once and are not expected to be repeated in the future.
• Net profit : Finally, there is the profit and loss account, which is obtained by simply subtracting all the company’s income from its expenses. This determines whether profits or losses were made during the year.

Steps to prepare a profit and loss account

The process of completing a profit and loss account requires time and a lot of organization, since the first step will always be to gather information on all income and expenses incurred during the analysis period.

Next, you need to classify all transactions according to the structure we showed you above. This is essential, as it allows you to save time and reduces the likelihood of errors. All data is entered into the normal models shown in the  General Accounting Plan in Part Three, Section II.

Once you have the data organized in the financial report, you can calculate the gross result (the sum of all income and expenses separately). From there, you can calculate the net result and determine whether you had a profit or a loss.

Finally, you need to verify each piece of data before submitting the report to the Tax Agency on the closing date. Take the time to make sure your profit and loss statement is accurate and gives you a detailed view of the state of your business.