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- Understanding Statement of Profit and Loss in Finance: Explained
Understanding Statement of Profit and Loss in Finance: Explained
Discover the significance of Statement of Profit and Loss in financial reporting. Learn about its purpose to report company profits or losses and how it reflects financial performance at segment and division levels.
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Video Transcript
Friends, welcome to video 14 which is about the Statement of Profit and Loss.
So with this video, now we are entering the discussion on different financial statements.
We had of course briefly talked about how those 7 financial ideas, accounting ideas
map into the 3 financial statements.
But here are some more details.
By the way, what is called as Statement of Profit and Loss in some countries is also
known as Income Statement in some other countries and in the yesteryears, it was also called
as the profit and loss account.
They all mean the same thing.
Friends on this slide let us talk about the purpose of this statement.
So the key purpose is to report whether the company has made profit or loss.
It is possible that at segment level or division level there could be some divisions which
are making profit, some losses but put together there will be either profit or loss.
So this statement tells us about that.
The information that it provides is about income which arises out of the goods which
have been supplied to customers, services which have been rendered and the resources
which have been used up to be able to render these goods and services and the net result
of these two which is the profit as we discussed earlier.
Please remember that expenses also include corporate taxes.
Just like we use various goods and services, we also use public goods which are provided
by state and national governments and we are required to pay tax towards that.
This tax is typically linked with the profit.
A part of that tax which is paid right now is called as current tax.
A part of the tax about which I am going to create a separate video later on which gets
postponed to later years is called as deferred tax.
These two together are to be reported as the tax expense for that year.
So let us look at the typical contents of the PNL.
So, income which is also called as revenue.
So, revenue from operations typically arising out of sales or rendering of service.
Other income which may include for example, scrap sale and other charges that we may levy
to customers which are not a part of our sales.
Then different types of expenses.
Now, here I may just mention that expenses can be reported in different ways.
One of the ways of reporting is by nature of the expense like what I am going to show
So, in this slide, like material cost, the purchase of traded goods, goods which are
manufactured by somebody else but they carry our brand and we finally manage to sell them.
But when we do that, as we had discussed in the context of matching principle, wherever
there is a change in inventory that is also required to be taken into account because
otherwise the quantity of goods sold and the quantity of goods purchased may not match
And to avoid this mismatch, we need to also take into account
into account the inventory change. Employee benefit expenses, finance cost or what is
called as interest, depreciation and amortization about which we have a separate video and taxes
like what I mentioned earlier in terms of corporate taxes. This is one way of reporting
expenses that is by nature. There is another way of reporting expenses which is what we
are going to discuss on the next slide. In some countries expenses are not reported by
their nature but they are rather reported by the function in which those expenses are incurred.
For example, manufacturing activity, administrative activity, selling and distribution,
marketing, research and development. On the earlier slide we had talked about employee
cost as an example. Employee cost would be residing in all these five functions but here
we are not reporting employee cost separately rather we are reporting all expenses under
