Learn something new every day
More Info... by email
A profit and loss analysis provides a detailed view of a company's income and expenditures. It can be used to determine the financial success or failure of a project, department, program or business. This analysis is a common part of annual reports and other such documents required by business owners, shareholders or governmental agencies.
In its most basic form, a profit and loss analysis compares how much money a company made with how much it paid out, with the intent of determining whether the company lost or made money during the specified time period. On one side of the equation are transactions in which funds were removed from the company's total asset pool. This can include not only costs attributable to situations such as lawsuit payouts or overpayment for goods, but also to normal operating expenses such as employee salaries, overhead or materials costs. The sum total of all costs is called the "gross loss."
On the other side of the equation are all the funds put into the company's total asset pool. This can include income from everyday sales as well as from special sales of real property or from funding initiatives. This total is called the "gross profit." By subtracting the gross loss from the gross profit, a business can find the net loss or net profit — the sum total gained or lost after all factors are considered.
Many companies perform a profit and loss analysis each year. In publicly traded companies, in fact, the process is usually mandatory. It might also be required of organizations that are required to report to governmental or other regulating agencies.
This type of analysis is also a common step in project management. In this case, it will determine whether or not a given project was profitable and whether or not profit goals were met. It can also help identify areas of unnecessary or unexpected loss as well as those of unexpected gain.
In some situations, an individual might look at his personal profits and losses. Someone who invests regularly, for example, may wish to conduct an analysis of the transactions of a given quarter or year to ensure that he is investing his money wisely. An individual who has set a specific budget also might look to see whether he has saved money or gone into debt and to ascertain how he has spent his money over the course of a given time period.
@Markerrag -- That is one of the reasons computers are such great things. Getting an accounting program and setting it up so that income and expense categories are added easily and profit & loss statements are generated at will is a pretty straightforward task.
The trick is getting whoever is handling the books to categorize income and expenses properly. That can take some training.
A profit and loss analysis is a great idea even if you are not dealing with a publicly traded company, a big company or any other type of business. A profit and loss analysis will show you which parts of your business are making money, which ones are losing cash and help you plan future moves for your business.
The only problem with preparing a detailed profit and loss statement is setting things up so your accounting is more than just "money in and money out." Categorizing income and expenses is essential, and such exacting accounting can get aggravating.