Understanding Profit and Loss Accounts and Business Accounting
The Profit and Loss Account
The Profit and Loss Account is a mandatory annual statement that provides critical information regarding the origin of a company's costs and revenues during the financial year. Like the balance sheet, this account must be developed at year-end. The Profit and Loss Account is designed to introduce several intermediate balances prior to the final year-end balance. These balances are obtained by comparing income and expenditure operations of a similar nature.
Key Financial Balances
- Operating Result: Records income and expenses resulting from the company's core business activities.
- Financial Result: The difference between financial revenues and expenses incurred during the fiscal year, stemming from investments and external financing.
- Results Before Taxes: Calculated as: Operating Income + Financial Result.
- Result of the Year: Obtained by subtracting the tax on business profit from the company's result.
The Role of Accounting
Accounting is the science that studies business assets and the scientific grounds upon which a company's economic information is registered. Accounting records should provide essential information for proper decision-making at various levels:
- Management: To facilitate the planning of future operations.
- Shareholders or Owners: To verify the status of their interests.
- The State: To ensure taxes are correctly applied.
- Workers: As the company's continuity depends on its results.
- Creditors: To assess creditworthiness and security regarding debt collection.
Determining Company Results
Results of the Company: Beyond providing a systematic way of knowing the financial situation via the balance sheet, accounting allows for the determination of company results after a period of activity, which usually coincides with the natural year. By calculating the difference between revenue and expenditure, we determine if the company has realized losses or gains. This result is reflected in a single account for the year.