Financial Statements: The P & L
The Income Statement or Profit and Loss Statement
There are four financial statements that firms release on an annual basis. One of the most important of these financial statements is the Income Statement.
There are several basic financial statements which accountants and other professionals work with regularly. These financial statements include the income statement, balance sheet, statement of cash flows, and statement of retained earnings. Each of these statements represents different information for internal (managers, employees, etc.) and external (investors, banks, regulatory bodies) users of the reports, and each is necessary to gain a clear understanding of a company and how it has performed in the past.
The income statement is one of the most important financial statements a firm will compile and it is audited periodically depending on the size and type of company.
The Income Statement
The income statement is also known as the profit and loss statement. This financial statement is important because it demonstrates whether a firm was profitable during a certain time period, and shows exactly how profitable or unprofitable that firm was. This particular financial statement focuses on the profits or losses resulting from a firm’s operations.
The income statement can be very useful because it shows how well a firm has performed in the past. It allows potential investors, management, and other interested parties to determine how a firm performed in the past, so they can predict how it will most likely perform in the future.
The income statement by itself is not a perfect document. Although the income statement should be created to be as transparent as possible, it is limited by certain factors. For example, the income statement shows certain expenses such as depreciation which may not have a noticeable effect on the actual operations of the company. It may also show certain cash inflows (for example accounts receivable) that may never be collected.
Income Statement Accounts
The income statement will include both revenue and expenses from operations. Other revenue and expenses from items such as financing activities or investment activities are summarized in other financial statements such as the statement of cash flows rather than the income statement.
The revenue accounts included in the income statement can include accounts such as sales revenue or service revenue. The expense accounts can include many different items that relate to the operation of the company. Again, these revenue accounts will directly relate to the operations of that business. Investment and financial revenues are included in another financial statement.
Some expense accounts that are seen on the income statement include accounts such as cost of goods sold (COGS), employee-related expenses (e.g. wage expense and various employer tax expenses), asset depreciation, insurance expenses (e.g. liability, worker’s compensation, and vehicle), and rent expense.
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