1. What is a profit and loss statement?
2. Are profit and loss statements compulsory?
3. Why prepare a profit and loss statement?
4. What are the components of a profit and loss statement?
5. Profit margin ratio's and break even anaylsis
6. Example of a profit and loss statement

What is a profit and loss statement?

The profit and loss statement is a summary of the financial performance of a business over time (monthly, quarterly or annually is most common). It reflects the past performance of the business and is the report most often used by small business owners to track how their business is performing.

As the name indicates the profit and loss statement (also known as a statement of financial performance or an income statement) measures the profit or loss of a business over a specified period. A profit and loss statement summarises the income for a period and subtracts the expenses incurred for the same period to calculate the profit or loss for the business.

Are profit and loss statements compulsory?

Sole traders, partnerships and small proprietary companies are not required to prepare and lodge a profit and loss statement with their annual tax return. However, they are very useful in helping you to objectively determine the financial performance of your business. Most accounting software packages will produce a profit and loss statement, but you may need the help of a bookkeeper or an accountant unless your business is very small.

All public companies and large proprietary companies are required by law to prepare a formal financial report that complies with Australian Accounting Standards for each financial year.

Why prepare a profit and loss statement?

Producing regular profit and loss statements (at least quarterly or monthly) will enable you to:

• answer the question, "How much money am I making, if any?"
• compare your projected performance with actual performance;
• compare your performance against industry benchmarks;
• use past performance trends to form reasonable forecasts for the future;
• show your business growth and financial health over time;
• detect any problems regarding sales, margins and expenses within a reasonable time so adjustments may be made to recoup losses or decrease expenses;
• provide proof of income if you need a loan or mortgage; and
• calculate your income and expenses when completing and submitting your tax return.

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What's next...

• Discover the essential components of a profit and loss statement
• View our example profit and loss statement
• Analyse your accounts using the gross profit margin ratio

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