Profit and loss account / Profit and loss statement / P&L statement

The profit and loss account statement shows the performance of a business in a given period. This period is usually one year. Basically, it is good if the revenue is more than the cost, but it is not so easy to judge the profit or loss, P&L.

The profit and loss account statement is part of the annual report. This is probably the most important accounting document that we need to see from time to time in relation to our business. This statement records how profitability the business operated in a given period. This period is usually a business year.  

The profit and loss account is basically about the company's expenses and revenue, and the difference between them. It's a pretty simple formula! If the revenue is more than the expenditure, then the company is profitable. If, on the other hand, the expenditure is more than the revenue, then the business is unprofitable. Of course, this basic truth is generally valid, but the matter is often more complicated than that. 

It does not matter what we consider the revenue and expenditure of the given period. Let's first look at a simple example of revenue! Let's say that we work all year on a long-term, significant job. This work will be invoiced before Christmas, but the purchase price will not be paid until January of the following year. In which year should we book the revenue in this case?

If we look at when we worked for this revenue, then this revenue is calculated for the year in which the work was done. This is called accrual-based accounting. In such a case, when the product has been completed and the expenses have also been reported, we calculate the revenue at that time, regardless of when the revenue was received. 

However, we can also see when the revenue was received. If the statements are prepared in this way, it is called the cash approach. Sole proprietors and smaller companies usually book with this approach. (The cash approach can be important not only in the statement of profit or loss, P&L, but also during taxation. From the point of view of a company's liquidity, it does not matter when the value-added tax on the issued invoices must be paid. Does this tax have to be paid in the period when the invoice was issued by the company? Or should this tax be paid in the period when the invoice was paid by the customer? The general rule is that the value-added tax must also be paid to the tax authorities during the period when the invoice is issued. However, in many countries, smaller companies have the option of paying cash accounting VAT scheme. So that you pay the taxes when the revenue is received by the company.)

The situation with expenses is not much simpler either. Let's say, for example, that our company buys a high-value machine and pays its price at the time of purchase. In this case, we cannot count the entire amount spent on the machine as a cost for that year either. In the case of such purchases, we can only calculate the expenses for the machine by dividing them over years according to the rules of amortisation. This is especially true if we paid for the machine in installments or leased it.

To make things a little more complicated, the result shown in the profit and loss account, P&L is not even a number. We know several types of business results. Each type of result is important and good for something. We can calculate indicators specific to the company from the various profit or loss, P&L data. 

The first profit figure for production companies is income from operations. In trading companies, this is called income from operations. This type of result usually shows the effectiveness of the activity. 

The result of P&L from transactions is also included in the profit and loss account. As the name suggests, this is the profit or loss, P&L of the revenue and expenses of the company's financial activities. This includes, for example, interest received and interest paid.

The earnings before taxes is also important. This shows how successfully our company managed the assets entrusted to it. At the same time, this is not yet profit, the company still has to pay taxes on this amount.  The amount remaining after paying taxes will be the after-tax profit or loss, P&L. This is already the company's profit, from which dividend can already be paid to the owners.

The owners of a company are happy if these numbers are all positive. If this is not the case, but there is a good explanation for the reasons for this, there is no need to despair. This is typical, for example, in the first one or two years of operation of startups. Even then, these companies are usually unprofitable. The situation is similar during more serious developments, when one or two years of profit can be sacrificed in the hope of a later return. 

It's a problem if we can't to finance our losses during such periods. It can also be a problem if an unprofitable period drags on for long years, and we have no realistic hope that the situation will improve.