Most business owners set up their organizations because they want to fulfill their passion, which is not always accounting (We are who you looking for if you need accounting services in Singapore). With that, it is clear that most of them don’t know, and others are completely uncomfortable with interpreting financial reports that they receive. In fact, some of the business owners never look at the financial statements because to them, explanations of profit and loss statement are too complicated. They just ask, “What is the profit/loss figure?”
Well, we can’t teach you to be a perfect accountant. Instead, we will give you the basics to help you understand the statement of comprehensive income (profit and loss).
Every profit and loss statement is based on a simple formula: all sales less all costs equals profit. Everything else is just breaking either costs or sales into finer details. Have you realized how simple it is to understand profit and loss statement?
Sometimes, the accounts use different words for costs, profits, and sales. This can make it hard for you to perceive accounting as a difficult task. For example, terms like income and revenue can be used instead of sales (Also see Accounting – FRS 18: How to Measure Revenue – Part 2). Additionally, expenses can be used to refer to costs, and sometimes profit and loss statement can be known as the statement of comprehensive income or the income statement.
Your business sales can be broken into several categories depending on the nature and complexity of the business, using a bookkeeping service, when it is not done in-house. For example, sales of a restaurant can be categorized according to how customers dine; some of them dine in, and others take their food or drinks out of the restaurant. All these sales are added together during the preparation of profit and loss statement.
Similarly, costs can also be classified into various categories. For example, you can have labor costs, material costs, and more. Note that costs listed in all categories will be summed up and that’s the figure you will see as total costs.
The total sales figure less the total cost figure equals the net profit. This is the profit, not cash (See Common Accounting Mistakes and How to fix them) your business earns after it subtracts all the costs. It is also the money that caters for other costs of running the business or reinvested in the business to generate more profit.
You no longer need to file profit and loss statements without comprehending what they say about your business. In fact, understanding them will help you to make sound strategic plans and decisions regarding how to make your business grow.