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."
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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.