Accounting 101: Profit & Loss Statement

Have you ever heard of P&L?



As the name says it is the statement showing one's Profit or/and Loss. It is a summary of one's significant sources of income and expenses. Others call it Earnings & Expenses statement due to the fact that it shows such details.

Now why such statement is important? This statement is important because it guides us regarding a business performance. When this report shows a profit it means that the business is in good shape but if it shows losses one must take a look into it to determine which areas causes such loss or one eventually consider closing the business to avoid further losses.

As the name says it shows the details of earnings & expenses. Categorizing or classifying earnings & expenses helps us make decision on where to focus our attention. If one knows the symptom one can easily make necessary actions to fix the problem. So as with this statement. If some expenses have become large but are actually unnecessary the owners can either cut it down or totally stop spending on such.

The basic equation for profit or loss is below:

Earnings - Expenses = Profit(if positive)/Loss(if negative)

By this equation alone one can analyze that:

- to make profit or avoid losses one must have higher earnings than expenses
- when earnings is at its highest limit(that is one has reached the maximum
earnings possible) the only way to raised profit is to cut on expenses
- to realize maximize profits one must increase earnings & cut expenses