Profit and Loss Statement: Meaning, Importance, and Types

Staff Writer

September 21, 2023

What’s in the article?

Singaporean companies are required to submit several statements and documents to the government to ensure compliance, one of which is a statement of accounts. This statement ensures that a company’s business income and expenses are readily available and usually includes the balance sheet, cash flow statement, as well as profit and loss statement.

What is the Profit and Loss Statement

A profit and loss statement, also referred to as an income statement, is a financial report that covers how much your company has earned and spent within a specific time period, as well as whether your business has made a profit or suffered losses, by providing a summary of all your income and expenses recorded in your account. 

Income can encompass sales—both completed and pending—while expenses can cover payroll, advertisements, rent, and insurance costs. Naturally, whether your business is put at either a profit or less will be determined by subtracting your total expenses from your total profits. A net income at a positive difference will indicate a profit, while a negative one will indicate a loss.

And while there’s no required period of time that these statements have to cover, they’re often prepared either at the end of a fiscal year or quarter. 

Importance of Profit and Loss Statement

The following are some benefits that both employees and company owners can expect when preparing their profit and loss statements:

  • Indicates Company’s Financial State: These statements are a great indicator of how efficient your business is at transforming revenues into profits, while also helping determine whether additional measures need to be taken to increase revenue and reduce costs.
  • Provides Valuable Insights for Future Planning: As these statements require companies to thoroughly break down their revenues and expenses, it’ll be much easier to strategize and spot areas of improvement and optimization, as well as find opportunities to increase income and minimize costs. 
  • Informs Investors and Creditors: These profit and loss statements can serve as valuable documents when companies are looking to persuade investors and creditors. With a positive statement as proof of the company’s capabilities, investors can associate with companies with more confidence and peace of mind.

Types of Profit and Loss Statements

Companies often choose one of these two methods to compile and finalize their profit and loss statements.

Cash Method

With the cash method of accounting, accountants record revenue upon receiving the cash payments and expenses upon the payment of cash. The main benefit of this method is its simplicity and ease of management, which is why it is the preferred mode of accounting for many small businesses. 

Rather than keeping track of money through receivables and payables, both revenues and expenses can be easily managed by simply monitoring the activity in the company’s bank account. Another advantage of this method is that companies can easily see how much cash they have at any time as they can simply check their bank account balances.

Accrual Method

As opposed to the cash method where money is counted once it is spent or received, the accrual method is the moment money is earned or spent, which doesn’t necessarily happen when money is earned or received. An example of this is when money is recorded once a project has concluded rather than when the payment has been finalized and made.

While this method gives a more accurate overview of a company’s financial performance, it may be more difficult to determine how much cash and money the company has at any given moment. It may also be confusing at times, especially when the results of this accrual method of accounting may not necessarily be reflected in the cash flow and balance of the corporate bank account.

How to Prepare a Profit and Loss Statement

Step 1: Total Revenue

When determining the revenue of your company, make sure that you only consider those that have been generated or received within the given time period, especially when performing the accrual method of accounting, and that you consider all possible channels of revenue. This figure can often be found in accounting records such as the company’s general ledger. 

Step 2: Costs of Goods Sold

This refers to the total inventory costs that a company incurs when selling products, including the cost of raw materials, equipment, electricity used to produce goods, and more. For companies that offer services instead of products, consultation time can be used as a basis for this calculation

Step 3: Gross Profit Margin

The gross profit can be calculated by subtracting the cost of goods sold from the total revenue of the company. This is meant to reflect the amount that the company makes or loses from its sales without reflecting its total earnings.

Step 4: Operating Expenses

Operating expenses include the following costs required to run a business:

  • Costs of goods sold
  • Employee salaries and benefits
  • Rent or lease payments
  • Utilities and office supplies and equipment
  • Subscriptions
  • Travel arrangements and expenses
  • Marketing and advertising efforts
  • Other operating expenses

All of these expenses should be added together to get the total operating expenses.

Step 5: Operating Income

This can be done by subtracting the company’s operating expenses from its gross profit. A positive result will indicate a profit, whereas a negative one will indicate a loss. 

Step 6: Profits from Additional Sources

Companies also have to disclose any earnings made outside of official revenue channels, an example of which is investments and dividends. This total should be added to the operating income to determine the earnings of the company before interest, taxes, depreciation, and more. 

Step 7: Tax and Other Expenses

Any additional expenses like taxes, interest payments, depreciation and more should be added together.

Step 8: Determine the Net Result

You can find this by subtracting additional expenses from the total earnings. A positive net result indicates a profit, while a negative net result implies a loss.

Reliable Accounting with WealthBridge

The reality is that not all Singaporean companies have accountants readily available, which can make the submission of forms such as profit and loss statements much more stressful. But with WealthBridge’s Accounting and Bookkeeping Services, all you have to do is hand over your invoices and receipts and let their professional team handle everything. 

Preparing accurate financial statements has never been easier, so visit WealthBridge’s official website to learn more today!

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