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Profit+Loss Statement

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Profit and Loss (P & L) Statement is one of the financial analysis tools employed by business enterprises to track the performance their enterprises.  The P & L statement is the difference between sales and expenses of an enterprise over a given period of time, often one year.  If this difference is positive, it is called Profit, while if it is negative, then it is called Loss.

The P & L statement is important for business operators/mangers to check the efficiency of their business strategies and take proper actions, if necessary.  The statement is also important for bankers to check business profitability, in order to comply or not with their investment requests before extending credit.

The P & L statements can only be done based on some source documents such as the cashbook, otherwise it would be very difficult to apply it, especially for micro enterprises.  Hence, for the P & L statement to be applied in a given enterprise, there needs to be a certain level of accounting system to be in place.

The P & L statement has the following elements:

• Gross sales: it is the total value of sales which is obtained by multiplying price of each product with the total units of outs puts sold.

• Returns and Allowances: stands for the value of damaged goods that are returned by customers to the business enterprise for which the business replaces with new ones.  It also considers payments that are made as sales commissions, discounts, etc. which again are deducted from Gross Sales to arrive at Net Sales.

• Costs of goods sold: stands for the costs involved with regard to direct labor, direct material and factory overhead which are deducted from Net Sales to arrive at Gross Profit

• Direct material: it stands for those costs of materials, which are directly used in the production process. E.g. raw materials

• Direct labor: refers to costs of all labor inputs directly used in the production of goods/services of a given enterprise.  Often the direct labor costs are measured on piece rates and cost of a daily labor.

• Factory overhead: stands for those costs incurred, but which are not directly related to the production process. E.g. depreciation of machinery or equipment, factory shade rent, etc

• Administrative and Selling Expenses: This includes costs incurred for some administrative purposes and distribution of products and it will be deductible from Gross Profit to arrive at Operating Profit.  These are salaries of management and support staff, expenses related to telephone, water and electricity bills as well as office rents and other similar expenses.

• Interest expense: is the amount of interest to be paid on the amount of loan obtained base on the going interest rate.

• Estimated income tax: the amount of tax that has to be paid as per the income tax proclamation.

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