The profit and loss account
The profit and loss account: the essential tool for any company
In order to follow the development of your company, especially if it is an SME, it is important to take into account its income and expenses. This also allows you to compare it to other companies or to previous years. To do this, the profit and loss account is a widely used accounting tool. When prepared on a regular basis, the profit and loss account gives you a good overview of your economic performance. Moreover, its use affects both internal and external stakeholders. These include management teams, investors and banks. What do you need to know about the income statement? The answers here.
What is the profit and loss account?
Also known as the profit and loss account, the profit and loss account is part of your company's individual accounts. As the financial statement of the company, 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 facts of a company are recorded in order to prepare the accounts. Generally, a financial year consists of twelve months.
The purpose of the income statement is to provide data on the economic performance of the company. To do this, it focuses on the various changes in assets (profits and losses). This allows the accounting document to show a net result. More concretely, here are two situations in which drawing up a profit and loss account can be useful.
The first situation concerns management teams. By providing them with the data in a profit and loss account, they are better able to manage the company. The second situation concerns banks (external bodies). The profit and loss account may be necessary when applying for a loan, for example.
Income statement and balance sheet: two identical concepts?
The balance sheet and the profit and loss account are an integral part of your company's annual balance sheet. They are therefore not the same document, but two different documents. Here are some explanations to help you differentiate between the two concepts.
In simple terms, the balance sheet tells you where your money comes from and how you use it. As such, it provides a summary of assets and liabilities, giving a picture of the company's assets and liabilities at a given date. Basically, the balance sheet gives you a clear picture of the current financial situation of your business.
The profit and loss account compares the costs (expenses) with the income (revenue). This analysis helps you to know whether you are making a loss or a profit in a financial year. For example, when the amount of income is the greatest, you are in profit. On the other hand, a higher amount of expenses indicates a deficit in the period under consideration.
In short, the balance sheet can be compared to a photograph of the life of the company at a given moment, whereas the profit and loss account is like a film.
Is the profit and loss account a mandatory document?
Just like the other annual accounts of your company, the profit and loss account is a legal obligation. According to article 958 of the Code of Obligations, all these accounts must be able to enable a third party to form a well-founded opinion of the economic situation of your company.
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 forms of income statement?
In order to have a better view of your company's performance, it is important that the analyses are well detailed. For this purpose, expenses and income are subdivided into categories:
- main business operations ;
- ancillary business activities; and
- non-operating or exceptional business activities.
Thus, the profit and loss account can be single- or multi-level.
The one-level income statement
This is the profit and loss account that provides the least information. It shows only income, expenses and profits. With this accounting document you can just make a quick and easy reading of the economic situation of the company.
The two-step income statement
This type of profit and loss statement consists of two parts: one for operating activities and one neutral. With expenses on the left and revenues on the right, this process highlights the profitability or otherwise of the main operation.
The first level represents the part reserved for operating activities. It includes the revenues related to the goods, the use of raw materials and the interest expenses of the company. It also includes items such as depreciation, wages and salaries. This level is concluded by the operating profit or loss, i.e. the operating result.