Profit and loss account

A profit and loss account, also called an income statement, is a financial report showing a business's income, costs and profit (or loss) over a given period. It gives an overview of the business's financial performance and profitability in the reporting period.

The profit and loss account is one of the most important parts of a business's accounts, and is used by internal and external stakeholders alike to assess the business's financial health and performance.

What it contains

Key components, and the usual steps in drawing up a profit and loss account:

1. Income: Represents the total funds or values a business has generated from the sale of goods or services during the period. This includes sales revenue, service income, subscription income and other sources of income.
2. Costs: Represents the expenses incurred in running the business and generating the income. This includes operating costs such as raw materials, wages, marketing, rent, electricity, administrative costs and other expenses connected with the business.
3. Operating profit: Calculated by deducting operating costs from income. It shows the profit or loss from the primary operating activities, before tax and financial costs are taken into account.
4. Tax: Represents the business's tax liabilities based on the income for the period and any tax reliefs or deductions.
5. Net result: The profit or loss after tax, calculated by deducting tax from the operating profit. This is the final result showing the business's total profit or loss for the period.

Why it matters

The profit and loss account matters for several reasons:

• It gives an overview of the business's financial performance, and shows whether the business is profitable or loss-making.
• It helps in evaluating the effectiveness of the business's operating activities, and in identifying areas with scope for improvement.
• It provides information to investors, lenders and other stakeholders who wish to assess the business's financial health and investment prospects.
• It is used to compare the business's results over time and against the industry average.
• It provides the information needed to prepare the annual accounts and to meet accounting and reporting requirements.

An official set of accounts in Norway is built on a chart of accounts running from 1000 to 8999, where every whole thousand (1000, 2000, 3000 and so on) is a top-level account group with more specific sub-accounts beneath it. Account groups 3000 to 8999 are set aside for profit and loss items.

Many key figures are calculated directly from the figures in the profit and loss account. Read more about how Capassa automates key figures.