The Profit and Loss Statement, (also known as an Income Statement or a ‘Statement of Financial Performance’) is the financial report most widely used to evaluate a businesses performance because it documents how much surplus money, or money after expenses, a business is generating.
All Profit and Loss Statements have the same basic layout and structure:
Revenue (or Income)
List of Income Sources
List of Expenses
Profit (or EBIT): which is equal to Total Revenue – Total Expenses
A Profit and Loss Statement could equally be used for your personal finances, and people often construct a budget for their personal finances which is laid out in the same way as a Profit and Loss Statement. Note that there is an important distinction between a budget and a Profit and Loss Statement – a budget is plan or prediction for future financial performance, while a Profit and Loss Statement is always looking back over some period of time to evaluate what actually happened.
A typical Profit and Loss Statement for a young person might look as follows:
Revenue or Income
My Salary (after $35,000
Dividends from shares $1,500
Gift from parents $500
Total Revenue $37,000
Health Insurance $1000
Entertainment / Going Out $4000
Total Expenses $36,000
Profit or Surplus Money $1,000
So this person is generating a surplus of $1,000 which could go into savings or an investment, or it could be used to buy something else.
An important question to ask when looking at a Profit and Loss statement is what time frame does it cover. The ‘typical’ Profit and Loss Statement shown above doesn’t give any indication of whether or not the financial performance is good or not because no time frame is specifically shown. This person could be generating $1000 profit a month, or year, or decade for all we know. Without a time frame it doesn’t mean anything.