Good recording keeping and precise calculations are valuable because they provide an accurate assessment of the company. At any time, an executive can take a look at a variety of reports to take the pulse of the business’ success. Your role as an accountant is vital for painting a clear picture of the company’s viability. Most of the information needed to file tax returns is collected in the same accounts set for the profit & loss statement.
Profit & Loss Statement
This statement shows business activity over a period of time, usually during a tax year. The balance sheet provides a snap shot of business activity at a given moment. In contrast, a profit & loss statement shows the bigger picture. For example, the changes and flux of business activity over a year.
It is an excellent tool for drawing conclusions about the company. It can be effective in determining how money spent on an advertising campaign influenced sales. It can demonstrate periods of heavy sale volume so in the future, more inventory can be ordered. A comparison of profit & loss statements from other periods can be done as well. These are just a few examples of how the profit & loss statement can be utilized to benefit financial planning and company projections for the future.
How to Develop a Profit & Loss Statement
It is compiled from actual business transactions. It shows three parts: income, cost of sales, and expenses. Prepare a profit and loss statement at the end of a tax year. However, it is also beneficial to prepare one at the close of each business month. The advantage of using accounting software, a common practice of the day, is a profit & loss statement can be easily generated for a period of choice by the click of the mouse. In double entry accounting, balances from revenue, cost of goods, and expense accounts need to be transferred to the profit & loss statement.