What is a profit and loss account?

A small manufacturer delivered a lot last quarter and the bank balance looks healthy. Whether it actually made a profit, the bank does not say. That is what the profit and loss account is for: it puts the income of the period next to the costs and shows what is left.

Unlike the balance sheet, which is a snapshot, this report looks at a period. It starts with revenue, deducts the cost of purchases, then the other costs such as rent, staff and depreciation, and ends with the result. The amounts come from the general ledger and follow the layout of the accounts. A sound trial balance is therefore the foundation.

What goes wrong? The report arrives too late, so you only see that a product is losing money after the quarter has ended. Or the layout is too coarse, with every cost lumped into one line. Missing bookings distort the picture too: a purchase invoice not yet processed, or a depreciation charge nobody has booked, makes profit look higher than it is.

Think about what you want to be able to do with it. If you want to see which product or department earns money, you need an account layout and perhaps cost centres that allow it. Always compare with the previous period and with your expectation, otherwise a single figure is worth little.

Profit on paper is not cash in the bank. A payment your customer has not yet made is already in the result, while the investment in new equipment is not. So read the report together with the balance sheet and your bank balances, never alone.