Profit & Loss Statement

Profit & Loss Statement is generally called as or earnings statement or income statement or statement of financial performance or statement of operations or operating statement in accounting.

The income statement, "profit & loss statement", or results of operations as it is frequently called, is the report that measures the success of an enterprise's activity for a given period of time.  The income statement, although it presents the most recent factual picture, relatively speaking, of the ability of an enterprise and its management to conduct its affairs on a basis that merits consideration by the investors, bankers, creditors and attorney, cannot be used alone to get a complete financial picture of the enterprise, since it is of limited use in determining the ability of the company to continue or improve upon its past performance.  The measurement and recognition of income is based on many assumptions, principles and constraints, such as periodicity, revenue recognition and conservatism, respectively. For these reasons, relying on an income statement, by itself, is inherently problematic.

The most common classifications on an income statement are: sales cost of goods sold, expenses, incomes taxes and extraordinary items. 

The presentation and content of income statement attempts to measure the effectiveness of the management is where the “bottom line” is located profitably. The bottom line is profit after taxes during a specific period of time. While the importance of the bottom line cannot be underestimated, the income statement also shows how the profit was made.

In looking at the profits of an enterprise, it is important to realize that profit is the result of the performance of the business in marketing, innovation and productivity. The user of the financial statements should determine the nature of the profits to appreciate the enterprise’s ability to repeat or improve on its performance.   

Questionnaire:

• What is income statement?
• What are the advantages of profit & loss statement?