What is a profit and loss statement?
If investors or managers want to analyze the financial health of a company, profit and loss statements are the key documents they look at. Also known as an income statement, P&L is a financial report that provides a summary of a company’s revenue, expenses and profit or losses over a certain period, typically a month, quarter, or a fiscal year. To better understand the financial trend of a company, it is important to compare P&L statements from different accounting periods as any changes over time tell more than the figures in a single P&L statement. For example, even if the company’s profits are growing at a steady rate, its expenses might be growing at a much faster rate.
All publicly trading companies must create a P&L statement at least once a year as a part of the financial year reporting. The taxation amount will be based on the profit figure, which is company revenue minus expenses for running a business.
Why are P&L statements important?
P&L statements will show the ability of a company to generate revenue, manage expenses and create profits. P&L provides insight into where money is coming from and how it is used. Put simply, it shows whether a company is profitable or not.
How do investors consider P&L statements?
Investors can retrace all necessary information about a company’s profits and losses over periods and gain in-depth insights into the financial situation of a company. A P&L statement will make it clear in which area a business strategy is failing and where it is successful, allowing for corrections in business strategy. P&L statements make it easier to assess a company’s future growth.
The structure of a profit and loss statement for IT companies
There is no binding form for creating P&L statements, but generally the structure contains two columns (or sections): Debit (all expenses) and Credit (all earnings) which will make the total profit and loss clearer. To get precise figures, it is imperative that your financial items have been recorded meticulously under the correct categories and accounts.
To learn how easy and transparently this can be done in Vault ERP, find out here. Vault ERP offers a feature that lets you record expenses and income in multiple currencies. This is especially useful if you have multinational companies. Your financial records will be accurate and financial items easily identified. For instance, you can record business trip expenses in different currencies in one account, and your set currency will re-calculate all transactions in your preferred currency. This way, you can match invoices and receipts with the correct transactions fast and error-free.
The Debit (Expenses) section in a P&L statement includes, but is not limited to:
- Cost of sales - Office space rent, IT equipment purchasing, app subscriptions, IT infrastructure, financial expenses, office supplies, smaller assets, utilities, software upgrades, cost of purchased services, etc.
- Staff cost – Salaries, team care, training.
- Repairs – Office and asset maintenance and repairs.
- Marketing – Advertising, social network subscriptions fees, content posting, etc.
- Depreciation – Asset depreciation (IT equipment, furniture, company cars)
- Taxes on income and earnings – Different rates can apply on different income categories.
The Credit (Revenue) section in a P&L statement typically includes:
- Sales Revenue – Products or services sold, customer account membership and subscription fees,
- Income from investment – Real estate or stock sales, asset sale, capital gains, dividends, and other passive income.
- Interest earned – E.g., saving accounts and other income generated by interest yielding investments
Deducting the total debit amount from the total credit amount will determine whether the company has made a profit or loss for the set period.
Bear in mind that a P&L statement is a complex calculation where many items require weighing up against each other, so it is best left in the hands of a qualified accountant. Alternatively, you can extract the P&L report from financial software. As mentioned before, using financial management software will make recording, reporting and account management effortless. It will streamline financial and accounting operations, automate repeatable tasks and processes, and allow you to make data-driven decisions quickly. For example, with the Vault ERP Finance Module, you can:
- Manage bank accounts, invoices, vendors, purchase orders, and GL accounts
- Centralize all relevant communications in the Incoming Centre
- Approve transactions and view activity in the Decision Centre
- View a summary of expenses for each period, transactions listed by categories, (estimates and actual) and evaluate the analytics of cost by job positions, offices, and departments.
If you have multiple companies and operate in different currencies, using Vault ERP will provide you with an in-depth overview of all the companies’ performance quickly. If we've interested you, contact our team for a demo.
What are considered expenses on the profit and loss statement for IT companies?
An IT company’s operational expenses will not differ from a non-IT company’s as you will still pay your staff, heat office premises, advertise, and supply the business with what it needs to stay operational. However, IT specific expenses will also occur.
IT companies need software licenses for a broad variety of software applications, while IT infrastructure will be larger and more complex, requiring high level of security. You might also pay intellectual property protection fees and incur research expenses. Hiring IT specialists for the duration of specific projects is not uncommon and training staff on new technologies will add to the cost as well.
What is the difference between a balance sheet and a P&L statement?
A P&L statement is closely linked to a balance sheet. Let’s take a look at what makes them different.
A P&L statement shows the company’s income, expenditure, and profitability over a certain period. On the other hand, the balance sheet provides a snapshot of its assets, liabilities, and shareholders’ equity at a specific point in time, typically the last day of a financial year. Investors use the balance sheet to evaluate a business’s performance alongside the P&L statement.
Financial software can help you to manage profit & loss accounts. A clear structure and streamlined processes such as raising a PO, getting approvals, and receiving payments will ensure transparency, reduce errors, and enable the collaboration of departments all in one place.
If you would like to learn how Vault ERP can help you to stay on the top of your finances, browse our available modules or contact us today.
