Profit and loss statement

What it means

The profit and loss statement shows how the company performed over a period: revenue minus costs equals the result. Unlike the balance sheet, which is a snapshot, it describes a flow.

The result is tracked at several levels: operating, financial, before tax and after tax. That breakdown reveals whether profit comes from trading or, say, from a one-off sale of an asset.

The profit and loss statement does not capture everything that happened to the money during the year. A loan repayment or a member’s contribution never appears in it, and a machine purchase appears only gradually through depreciation, because they change the structure of assets and funding, not the result. Money movements are shown by the cash flow statement.

How it works in practice

The statement is read top to bottom and always against a comparison - the same period last year, or the budget. A number on its own says nothing about whether it is good.

From it come the measures used outside accounting: margin, return on sales (return ratios) and EBITDA. With the balance sheet and the notes it forms the annual accounts.

Clients on double-entry books receive an interim statement from us each month or quarter. The director then does not see the result for the first time at year end, but can estimate during the year what balance of income tax is coming, set the money aside or reconsider a planned investment.

What to watch out for

Profit in the statement is not money in the bank and cannot be used to plan distributions. Watch one-off items too - a car sold, a provision released, FX differences - which move the result while saying nothing about the operation.

The accounting result before tax is not the tax base. Anyone who calculates tax straight from it forgets the non-deductible expenses and other adjustments under the Income Tax Act, and is surprised by a larger balance due than expected when the return is filed.