A profit and loss statement provides an accounting of corporate expense management and long-term profitability. Also known as a statement of income or income report, a profit and loss statement tells the public how much revenue a company generated over a period of time and how much it spent to reap the profits.
How It Works
A profit and loss analysis starts with the preparation of a trial balance, which is an accounting summary that helps a business confirm the equality between debits and credits. Accountants use trial balance data to prepare an income statement, ensuring that bookkeepers accurately recorded expense and revenue information. Accountants then pore over each item in the revenue section -- going over income from sales, investment gains, refunds and vendor rebates. They also comb through expenses, set material costs apart from administrative charges, and bring to light processes that are costing the company money.
The analysis of profit and loss accounts is important to avoid the often simmering criticism that comes from investors eager for sound profitability management, especially equity holders with a long-term outlook. If a company has experienced a string of operational failures in the past, preparing an accurate and positive income statement might bring a measure of redemption to top leaders. They can then tell the rest of the world that the business is back on track, financially speaking. For a profitable organization, preparing an income statement is a confidence builder because it helps top leadership confidently declare to financial markets that the company is still trumping the competition and might do so for the foreseeable future.
Professionals who analyze profit and loss accounts typically pay attention to details, communicating profitability information in clear, well-prepared reports. Their mathematical disposition and investigative flair help them dig deep into income statements to check data accuracy and weed accounting errors and inconsistencies out of the reporting process. For example, accounting personnel may review the income statement to confirm that sales amounts match customer remittances and outstanding receivables, both of which are balance sheet components. Other abilities that profit and loss analysts routinely display include working on multiple tasks at the same time, being good with financial software and working in teams.
Tools and Technology
An organization uses various worksheets and equipment to confirm profit data accuracy, preventing investors from bombarding senior management with phone calls and written notifications asking for more transparency. The tools of the trade include financial accounting, analysis and reporting software (FAARS); information retrieval or search software; and customer relationship management applications. These programs enable the business to identify top clients and mount a sound strategy to make more money, record it correctly and expand market share. Other tools include enterprise resource planning software and sales management applications.