The profit and loss account: the essential tool for any business

The profit and loss account: the essential tool for any business

In order to monitor the development of your business, particularly if it is an SME, it is important to keep track of its income and expenses. This also allows you to compare it with other companies or with previous financial years. To achieve this, the profit and loss account is a widely used accounting tool. When drawn up on a regular basis, the profit and loss account gives you a clear picture of your business performance. It is used by both internal and external stakeholders. These include management teams, investors and banks. What do you need to know about the income statement? Find out here.

What is the profit and loss account?

Also known as the profit and loss account, the profit and loss statement is part of your company's individual financial statements. As the company's financial statement, this document summarises all the income and expenses for an accounting period. The accounting period is defined as a period of time. During this period, all the economic events of a company are recorded for accounting purposes. Generally speaking, a financial year lasts twelve months.

The purpose of the profit and loss account is to provide data on the company's economic performance. To do this, it focuses on the various changes in assets (profits and losses). This enables the accounting document to show a net profit. More specifically, here are two situations in which drawing up an income statement can be useful.

The first concerns management teams. By providing them with income statement data, they are in a better position to manage the company. The second situation concerns banks (organisations outside the company). The profit and loss account may be necessary, for example, when applying for a loan.

The profit and loss account and the balance sheet: two identical concepts?

The balance sheet and profit and loss account form an integral part of your company's annual balance sheet. They are therefore not the same document, but two different ones. Here are a few explanations to help you differentiate between the two concepts.

In simple terms, the balance sheet shows where your money comes from and what you do with it. It provides a summary of assets and liabilities, giving you an overview of the company's assets and liabilities at a given date. In short, the balance sheet gives you a clear picture of your company's current financial position.

The profit and loss account compares expenses with income. This analysis helps you to know whether you are making a loss or a profit over the course of a financial year. If your income is higher, you are in profit. On the other hand, if your expenses are higher, you are in deficit for the period in question.

In short, the balance sheet is like a snapshot of the company's life at a given point in time, while the income statement is like a film.

Is the income statement a compulsory document?

Like your company's other annual accounts, the profit and loss account is a legal requirement. In accordance with article 958 of the Code of Obligations, all these accounts must enable a third party to form a well-founded opinion of your company's economic situation.

Article 959 b of the Code of Obligations gives you two options for the minimum structure of the profit and loss account. The first is the income statement by nature (described in paragraph 2). The second is the income statement by function (described in paragraph 3).

What are the different types of income statement?

To get a clearer picture of your company's performance, it is important that the analyses are detailed. To this end, income and expenses are subdivided into categories:

  • main business operations ;
  • the company's ancillary operating activities ;
  • non-operating or exceptional business activities.

In this way, the profit and loss account can have one or more levels.

One-level profit and loss account

This is the profit and loss account that provides the least information. It shows only income, expenditure and profits. With this accounting document, you can just make a quick and easy read of the company's economic situation.

The two-level income statement

This type of income statement has two sections: one for operating activities and one neutral. With expenditure shown on the left and income on the right, this process highlights the profitability or otherwise of the main business.

The first level represents the part reserved for operating activities. It includes income from goods, the use of raw materials and the company's interest expenses. It also includes depreciation, wages and salaries. This level is concluded by the operating profit or loss.

The second level takes into account income and expenses from ancillary activities, non-operating or exceptional income and expenses. By adding these to the operating result, you can determine the result for the financial year.

The three-level income statement

Depending on your sector of activity and your information requirements, you may need to use a three-level income statement. In addition to a section reserved for operating activities and a neutral section, it includes a section reserved for commercial activities.

  • The first level: this relates to commercial activities and therefore to income and expenses associated with goods. Gross profit is calculated on this basis.
  • The second level concerns operating activities. Staff costs and depreciation are deducted from profit. This stage concludes with net operating profit.
  • The third level : this is the neutral part, involving income and expenses relating to non-operating activities. After adding and subtracting all the items, the net margin (profit for the year) is obtained.

In addition to one-, two- and three-level profit and loss accounts, there are others (five-level, for example). The greater the number of levels, the more detailed and consistent the information. To make it easier for you to draw up the profit and loss account, accounting software can be a great help.

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