Profit and Loss Statement – Why and How is it Prepared?

Some would say that business is a wager—a gamble. Others spent their family heirloom to start an industry that promises profit. Some engage in risky loans to have the capital that they need. While there is a science to business, the first step in venturing into the playing field would always feel like a leap of faith. Furthermore, entering the business world means sticking your eyes to the future and now. Therefore, profit and loss statements are necessary outputs coming from uncompromisable processes. So better do your accounting well, as ignorance could mean inevitable harm. what-is-a-profit-loss-statement-why-and-how-it-is-prepared

Download this Free Profit and Loss Statement - Why and How is it Prepared? Article in PDF

Profit and Loss Statement – Why and How is it Prepared? Download

Profit and Loss Statement – Why and How is it Prepared?

Profits in Business

Business enterprises multiplied exponentially when the market became freer, i.e., when the business elites took hold and let the invisible hand guide them. And as many businesses sprang by the desire to gain profit, the competition got stiff, and everybody seems to be at odds at each other. Strategic alliances and partnerships are the results of collective action towards surviving in a competitive domain.

We see an arsenal of business experts ascertain maximum profit while also offering a status check of the entire machinery. When businesses grow larger, management becomes a precarious task. Thus, the continuous effort to gather updates, plus the nerve-wracking deliberation processes are what keeps the top offices burn their midnight candles. Surviving and gaining profit are the goals. Unlike a game of dice, you do not rest your bets on luck. Every business has a self-checking system.

What is a Profit and Loss Statement?

A profit and loss statement is an accounting document indicating how much earnings, losses, and incurred gains a business has. It usually stems from other sheet documents such as income and expenses statements. Moreover, the document can serve multiple purposes such as documentation, tracking, checks and balance, legal requirement, and report profiling.

Even non-profit organizations create accounting documents for tracking progress and operations; however, they cannot fill out the profit and loss statement. All the organization can do is to plot out the preliminaries to the said statement.  Plus, the absence of informative attachments will create financial management questions which makes the necessity of this document is unparalleled.

Why Prepare a Profit and Loss Statement?

The accounting desks are where your financial statements lay their heads. A little backtracking can bring to the time where accountants fill a whole building floor with dozens of counters and tons of papers. Bosses walk along each aisle, making sure that everybody was on full steam, as critical decisions rest on the back of the timely updates.

You want an accurate statement that stands between bad and good decisions; thus, getting the right one means using the aces up in your sleeves. So do remember that the market is a cruel competitive arena, and surviving means knowing all too well your resources. How crucial? The list below tells the functional reasons why profit and loss statements are necessary.

Positive Functional Aspects

Documentation

Above all else, documenting every penny is the accountant’s drive when dealing with accounting sheets. Making your profit and loss statement is not a senseless, repetitive, and futile paperwork. Today, storing multiple authentic soft copies is convenient through the computer, but printing still plays a role. Either way, both documentation processes are vital as you cannot just go over a year without any documents. Moreover, business plans are a staple, and it would be hard to support the proposals without backup papers. As much as possible, putting to ink or through encoding, one can have an actual reference.

Tracking

Statements are instrumental, especially in being informative. Consider your cash flow statements as a window to your finances, and with a clear view means you know your place. Moreover, knowing your footing is critical, as significant decisions lie in wait with every step you take.

Compliance

The accounting department has to make a financial report, whether daily, weekly, monthly, quarterly or annually. Since it is their task, creating one is complying with their job requirement. But for the business owners, profit and loss statements are required documents to submit to legal authorities. Business regulation and oversight are present in most countries, and for tax purposes, permits, and licenses, attaching accounting documents is mandatory. And without the supporting documents, freezing or seizure of business rights becomes imminent.

Checks and Balances

The figures in the balance sheets can help you initiate a breakeven analysis document. Or, it can help indicate that the business has healthy revenues. Knowing your footing does not end in having a printed number. It also means interpreting the results to see the actual status. You may have significant figures, but in further analysis, you are already in the critical zone.

Without your statement sheets, any further analysis of the company’s status will be futile. Data-driven analysis demands data, and start first by completing your sheets.

In the Absence of this Statement

The document’s benefits are commendable. However, its absence outweighs all positivity and can sink the business entirely. Here are the following consequences that any industry inevitably encounters when they are lax with their accounting.

Subpar Decisions

Making decisions out from nowhere will be frequent as gut feels take precedence due to the unavailability of facts. Business cannot do without points, and second-guessing paired with a crystal ball will spell its demise. Sentiments alone cannot produce wise strategies.

Moreover, placing your decisions on the actual volume of money is not sufficient, as numbers without analysis are just figures. Thus, the decision’s validity rests with accurate data reading.

Lack of Accountability

Reviewing the finances is crucial in every business, and when the need arises, documents should be available as references. In times of problems, such as financial disputes, tracing funds will be highly improbable, and even if the other supporting papers are present, urgently coughing up an output would be much of a hassle.

There are corporate decisions under a well-regulated market that needs proof. And in the absence of evidence, companies are barred from executing their actions. Etch this in every company that accountability is the purpose of accounting.

Legal Actions

Business operations cannot proceed without a signal from a regulatory board. And if a business wishes to abide by corporate laws, mainly on taxation, accurate reports need to be present. Without those documents, sanctions are inevitable. Legal actions against a business can include penalties and closures.

How to Prepare a Profit and Loss Statement

The fine line between a company that creates substantial decisions from those who do not rest partly on the awareness level. One cannot make crucial plans and devise approaches without grounds, especially financial concerns. Thus, an integral part is your statements. Follow the list below to start making your winning sheets.

Collect Receipts

Accounting for profit starts from going through all income sources. Documents like your receipts and invoices serve as a written reference for the figures inside your coffers. And with an excellent auditor’s aide, gathering all these documents will be a cinch.

Account for Income

Tabulating the cash influx through the receipts and invoices can be through the old manual way, or you can use the trusty high-end spreadsheets. As much as possible, you categorize the sources with their respective sums to create a more detailed approach. Moreover, do not forget to add everything up to see the lump sum; and through this, you have your income statement.

Gather All Expense Details

What is a business without expenses? Expenditures are necessary parts of the investment scheme with the hopes of returns. So you need to collect documents detailing the costs that the industry incurred to have grounds for doing accounting.

Calculate Expenditures

Once all documents detailing the expenditures are in place, doing the necessary calculations either manually or using software is next. It is also practical to categorize the expenses for tracking. At least, not only do you know where your expenses are, but you also know how much was expended.

Prepare Other Significant Documents

Other documents can also affect the results of the statement, such as a revenue expense sheet matched with a pro forma statement. Do a review of your other sources of income and do indicate the sources for your expenses. If you spent funds outside the company’s coffers, then that would have a separate accounting approach. As much as possible, make sure that all transactions are well within the respective business.

Make the Deduction

Profit and loss is a simple deduction of specific figures. However, it is precautionary to have experts on the field who can competently do the rechecking. There might be lapses with the entries or human and program errors that could compromise the results. Again, the everyday deduction process is easy, but always pair the task with a thorough review.

Make A Summary

The statement sheet can be as simple as a table. But you can add further descriptions when the table is not enough to convey the data. And to be even sure, having both is the safest way to go. Cater to the readers a table for easy viewing, and paragraphs and sentences for more detailed labels.

Business and Vigilance

Avoiding closures and bankruptcy belongs to the same side of the coin with gaining income and profits. All business persons’ nightmare is losing the race and losing it big time because of not knowing what is happening under their noses. Business management is not as easy as your company’s survival, the jobs of many people, and your client’s satisfaction are on the line. Just like any competent diagnosis that leads to precise actions, a manager does the same to the company. Frisking every dark corner for answers and data is a must. Accounting is the most potent diagnosis that managers are looking for when it comes to finances. And if the management is always on the hunt for profit margins, incurred losses, and stability, ramping up the accounting department is a top priority.

Avoid Financial  Pitfalls

Many companies around the world are filing for bankruptcy. And one thing is for sure; these corporations are at one point, unable to pay their obligations. It could be that the failure stems from having not enough resources anymore to meet the demands. More so, a possible trigger is when profit is negative and not anymore manageable through remedies. And before putting the company’s bankruptcy to the public light, the financial analysts already saw the potential horror in the statement sheets.

A claim that one is in the red zone, or one is already skyrocketing beyond foreseeable ceilings is not easy. Claims need supporting documents and rigid evaluative processes. And once you are starting a business, do take serious note of the monumental upkeeping task you need to do. Your business plans must be sensitive to the possibilities of failure but must be proactive when crises come. So before you set up any gathering or publicity, religiously do your accounting.

Business processes are so many that a vast network of workers and documents are essential to keep an industry thriving. Seeing profits and preventing losses are in every business person’s mind. Stepping into the wage and working hard to make everything work in one’s favor is not possible without the accounting process. Your profit and loss statements are indispensable as this document guides future decisions and actions.

Although it is healthy to embrace the advantages and disadvantages of business documents, the trade-offs are far worse without the statement sheet. So there is no “if” when trying to make the sheet because the sheets’ absence will bring your company in different kinds of trouble. Better be vigilant, stay updated, produce those papers, and tread carefully to survive in the business arena.