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Profit and loss statement also is known as an income statement, statement of operations, statement of financial results or income, earnings statement or expense statement, is a financial statement that summarizes the revenue generated, costs and expenditure done in a specified period of time, in one single document and then finally showing total income and total expenditure done by the company.
This document helps in showing what financial transactions the company has done in that particular period and then finally helps to tell whether the company has made a profit or a loss and how much.
Terminology Related to Profit and Loss Statement
There are certain particulars and terms used in a Profit and Loss statement, which are quite common. Those include: –
- Revenue – It is basically the income that is generated from normal business operations and sales of services which the company offers.
- Interest Expense – It includes the interest which the bank charges or sometimes some other financing company charges in return for the finances they have given to the company.
- Cost of Goods Sold – This refers to the cost spent on producing the goods sold by the company or the cost spend in providing the services which the company offers.
- Selling, General and Administrative Expense (SG&A) – Herein, all the expenses incurred by the company for sales, general activities, and administrative activities are included.
- Net income – This includes the sum of all the incomes of the company.
- Net Margin – This is the percentage amount that explains the the profit earned by a company in comparison to the revenue it has generated.
- Depreciation – It accounts for the reduction in value of the fixed asset during a financial year. Generally, depreciation appears as an expense in the Profit and Loss statement. It is normally recorded as an “Non-Cash-Expense” for it does not have any direct effect on the cash position of the company.
What is the use of making Profit and Loss Statement?
While running any business in Dubai, you cannot just make decisions according to your gut feeling, on the contrary, you have to think of decisions only after proper planning and discussion of facts and maybe also considering the present situation of your company in Dubai. This analysis is possible only if you have information and data about your company, which may include the ledgers, bank statements, income tax returns, the records of the financial transactions of your company.
This data empowers you to make decisions for the company’s betterment and also tells you whether the company is strong enough to support your decision. You can just keep thinking that your company in Dubai runs in profit, but somewhere down there, it might be so possible that you are going on to lose money from your pocket with none coming in. Moreover, making of Profit and Loss statement is one of the main steps required to complete your company’s accounting process.
What is the need for small businesses to make Profit and Loss Statement?
Whatever turnover your company has, however, small your sales and your product range are and however deficient your company’s income is, preparing a Profit and Loss statement is still a must for you because it does the following things: –
- Gives a Real Proof
Profit and Loss statement acts as the real and accurate proof which tells about the company’s financial condition and whether it is in a loss or is it making a profit.
- Income Tax Returns
Businesses are liable to pay various kinds of taxes to the government, and for the calculation and the payment of those taxes, Profit and Loss statements are very much important because they decide that your business falls in which category and what amount of taxes.
- Helps to make decisions
The Profit and Loss statement empowers you to make decisions for the company’s betterment and also tells you whether the company is strong enough to support your decision.
- Fetch Investors
Companies every now and then require financers to invest their money in new projects, and any investor will judge a company only through the Profit and Loss statement of the company. Profit and Loss statement.
- Getting Loans
For offering loans, banks always ask for the applicant’s or, in this case, the company for their Profit and Loss statement.
How is Profit and Loss statement different from Balance Sheets?
Often people get confused between Profit and Loss statement and the Balance Sheet. These are two different financial statements that have many things in common, which makes it look similar.
Both are financial statements created for slightly different purposes. Balance Sheet is a statement revealing what all the company owns and what it owes, which also includes those long term investments done by the company whereas a Profit and Loss statement offers an answer to one question of whether the company is in profit or in a loss.
How to prepare a Profit and Loss statement
Now that you know about the importance of Profit and Loss statement let us discuss how you should go about preparing a Profit and Loss statement.
- Hire a Bookkeeper
You can hire a bookkeeper who does this job of data entry and making your company’s Profit and Loss statement in Dubai. A bookkeeper is a person who does the job of bookkeeping. Bookkeeping is the legitimate process of recording company or business’s financial transactions. From purchases of the small stationery to purchases of the raw materials required for the business, sales, income tax returns, receipts of payments done to employees, or other organizations, all are recorded in this process of bookkeeping in Dubai.
- Hire a Firm for Bookkeeping
You can even get the services of a company providing bookkeeping and accounting services in the Dubai.
- Use of certain software
Nowadays, there are several online software that can easily perform this work of preparing a Profit and Loss statement. All you need to do is enter your transactional details.