Profit and Loss Statement
January 6th, 2012
Profit and Loss statement is a flow statement that measures the performance of an organization over a period of time. Some key points to note in a profit and loss (P&L) statement:
- It is an accounting statement (Uses accrual concept): That means accountants can change it at their will (Pun intended!)
- It is for a period: That means whenever you see any P&L, it would be for (let’s say) 1st Jan 2010 to 31st Dec 2010!
- P&L is like a Pipe! Money (In the form of revenues) flows into this pipe and Money (In the form of costs) flows out of this pipe! So what happens if they are not equal?? Wait… you would see in the next article on Balance sheet that it flows in a bucket called the Retained Earnings of the balance sheet!
So if you were starting a business (and an interesting one on top of it!) of selling chocolates! You sell 100 chocolates for USD 1 each. You get the top line (Also called the revenue) of USD 100.
Whatever is left from the revenue after paying the RM Cost i.e. Cost of goods sold is called the Gross Profit!
Somebody has to work hard to manufacture these chocolates (We need to thank them for their hard effort)! The cost that you pay to your factory workers is called the wages (Direct cost).
Whatever is left from the gross profit after paying the wages is called the EBITDA!
You might be wondering about plants and equipment (P&E) needed to manufacture the chocolates – Are You?
Yes, P&E are needed and when it is used in the day-to-day operations, its useful life decreases and needs to be replaced once its life has been exhausted.
So, don’t you think a cost should be allocated in the period the P&E is being used?
Obviously cost needs to be allocated! This cost is known as Depreciation for tangible assets like P&E whereas for intangible assets like patent it is known as amortization.
After deducting depreciation/amortization cost (as the cash may be) from the EBITDA you land at EBIT.
To purchase this P&E you need capital – either you will bring your funds or borrow funds or most possible case you borrow as well as bring in our own funds.
It’s pretty sure no one will lend you at free of cost! The cost you pay for borrowing funds is called Interest payment.
Whatever is left after paying the interest is called the EBT!
This is the money you have in the hand! Excited?
You need to pay taxes to the government for allowing you to do business in its territory.
The amount that is left after paying taxes is called Net Income. This is what you will get!
This amount can be used to further expand your business or you can take it to your home.
The amount you invest in your business expansion is known as retained earnings and the amount you take home is called dividend in accounting language.
You can draw the real Profit and Loss statement by downloading the attached excel sheet.
Profit and Loss Templates to download
I have created a Profit and Loss template for you, where the subheadings are given and you have to link the model to get the cash numbers! You can download the same from here. You can go through the case and fill in the yellow boxes. I also recommend that you try to create this structure on your own (so that you get a hang of what information is to be recorded).
The template that I have provided also contains the Debt Schedule and the Asset Schedule, which we will be covering in later posts.
Also you can download this filled template and check, if the information you recorded, matches mine or not!
About the Author
Pankaj Baheti is a CFA Level III Candidate currently working with Pristine. Prior to Pristine, he was working with Achi Group. He has done his Post Graduate Diploma in Management and loves trekking in the hills of Arunachal.
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