The Use of Profit and Loss Statements
This report will discuss the usage of a profit and loss statement in accounting as well as explaining why expenses are separated into specific categories in these reports. The different types of profits measured in this statement will also be explained.
ROLE AND PUPOSE OF A PROFIT AND LOSS STATEMENT:
1. Role of a Profit and Loss Statement
A profit and loss statement is a report prepared for presentation to interested parties showing details of a profit (or loss) for a business for a set accounting Period (e.g. one month, 6 months or a year).
2. Purpose of a Profit and Loss Statement
The purpose of a profit and loss statement is to indicate the financial performance of the business over one accounting period, providing stakeholders with important information with regards to the firm’s operations. This report contains all expense, revenue and stock values for a set period of time.
EXPENSES IN A PROFIT AND LOSS STATEMENT:
1. Types of Expenses
There are three broad categories of expenses recorded in a Profit and Loss Statement: cost of goods sold, operating expenses and non-operating expenses. a) Cost of Goods Sold (COGS) - includes all stock related expenses for the business e.g. purchases, freight inwards, customs duty etc.
b) Operating expenses - include the normal day to day costs of the business except COGS and are broken into three groups: selling and distribution (costs incurred in promoting/selling goods); general and administrative (costs incurred in running the office and miscellaneous expenses); finance (costs associated with financing the business or collecting cash).
c) Non-operating costs - are expenses incurred outside the normal course of the business e.g. damage from flooding, loss from theft etc. They are usually not recurring.
2. Reason for Separation
The expenses listed above are separated into categories to provide stakeholders with information about...