The profit and loss account: definition, usefulness and examples to help you become an expert

What is an income statement in accounting?

If you are a trader, in most cases you are required to draw up annual accounts at the end of each financial year. And the profit and loss account is one of the documents you need to provide.

But what exactly does it consist of? What is its purpose and how does it differ from the balance sheet ?

Find out all you need to know on the subject!

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What is the profit and loss account? Definition

The profit and loss account, or P&L, is part of the annual accounts, along with two other financial statements:

• the balance sheet

• and the notes to the accounts.

For a given financial year, the profit and loss account shows :

• income, i.e. revenues or sales,
• and expenses, i.e. the various costs incurred by the company.

If revenues exceed expenses, the company is profitable.

What is the purpose of an income statement?

By showing a company's net profit, the profit and loss account reveals its profit or loss for the financial year.

This document is therefore useful for :

• the tax authorities 👉 the annual accounts serve as the basis for calculating the company's tax liability.
  
• company directors 👉 by analysing the breakdown of income and expenses, they are able to make better strategic decisions.
  
• investors or purchasers 👉 by analysing the operating result, they are able to assess the financial health of a company.

What is a projected income statement?

There are also projected income statements. These are of particular interest to banks and credit institutions, especially when they consult a business plan.

They are based on forecasts of :

• sales
• exceptional items
• financial income, etc.

The projected income statement is therefore a valuable tool for predicting the company's future profitability.

What is the difference between the balance sheet and the profit and loss account?

The balance sheet is another compulsory accounting document, showing the state of the company's assets and liabilities and any changes since the company was founded.

Unlike the balance sheet, the profit and loss account focuses on the results for the year.

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Example of an income statement table

In this example of a detailed income statement, we distinguish between the three main parts that make it up:

• operating profit,

• the financial result
• exceptional items.

economie.gouv.fr

To find out more, follow the steps and advice in our article on how to read and draw up an income statement!