Understanding your profit and loss statement (P&L;) enables you to know how your business is performing. Analyzing your statement allows you to determine how much cash you have available to pay debt and expand your business. The P&L; statement shows your company's financial data from a certain period, as opposed to the balance sheet that shows you financial data at a given moment.
A typical P&L; statement divides income and expenses into categories enabling you to quickly see how much you are spending on different expenses and where you receive your income. Categories include operating, nonoperating, irregular items, disclosures and earnings per share (EPS). Businesses normally divide some of the categories into subcategories to separate financial information even further.
Businesses divide operating expenses into subcategories such as costs of goods sold (COGS) -- how much it costs to buy or manufacture your business's goods -- depreciation of your assets and how much research and development (R&D;) costs your company. Another expense subcategory is selling, general and administrative expenses (SGA). This subcategory divides your selling expenses -- freight charges, advertising and commissions -- from your general and administrative expenses such as payroll, insurance, rent and office supplies.
The non-operating expense section lists any other expenses your business encounters. Examples include income taxes, financing costs and, if you sell your product in other countries, foreign exchange losses. Revenue to include in your nonoperating section includes gains from selling fixed assets or rent from property that your business owns if you are not in the real estate business.
Typically, irregular items on P&L; statements include one-time expenses or revenues incurred by your business. If you change your business accounting method and it causes a change in the value of your business, include the amount changed in your irregular items. You must show any revenue or expenses from any discontinued operations as a subcategory of your irregular items.
Total Profit or Loss
The phrase "bottom line" comes from the fact that the bottom line of a P&L; statement provides the net income -- or loss -- of your business. If, after subtracting all expenses from all revenue, the bottom line number is positive, your business is operating at a profit. If the number is negative, your business is operating at a loss.
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