The most important thing to understand what the profit and loss account means is to understand that it includes the result of the year and the income and expenses from which it comes according to its nature. We review it in this post.
- It remains a very useful instrument both to follow the evolution of one's own businessas to project it to third parties
- The regulations distinguish income and expenses that go to the profit and loss account of others that are included in the net worth
In the minds of inexperienced entrepreneurs, increasing the positive balance of the profit and loss account is, in most cases, one of their main objectives.
As time goes by, they realize that there are other objectives beyond the profit and, above all, that not all profits appear in the accounting. However, the profit and loss account remains a very useful instrument both to follow the evolution of the business itself and to project it to third parties.
What is the profit and loss account?
It is an accounting document that collects the Result of the excersice and the income and expenses from which it comes according to its nature. Therefore, the important thing to understand what the profit and loss account means is to understand that it is the result of the exercise and not to confuse it with other similar concepts.
The result of the exercise is an accounting figure that responds to the difference between accounting income and expenses. Income is understood as any increase in assets or decrease in liabilities that is not caused by a contribution from the partners or owners of the company. Meanwhile, expenses represent the opposite concept, that is, increases in liabilities or decreases in assets that are not related to distributions to partners.
However, currently, it must be specified that accounting regulations distinguish income and expenses that go to the profit and loss account of others that are attributed directly to the net worth.
While the balance sheet shows us an image of a specific closing moment, the profit and loss account informs us of what happened over a period. detailing all income and expenses for the year.
Similarities and differences of the profit and loss account with other concepts
The income and expenses reflected in the profit and loss account are the starting point for determining the tax base of the Corporate Tax and also the performance of economic activities, in direct estimation, in the personal income tax when the taxpayer is obliged to prepare annual accounts.
In fact, the Corporate Tax Law establishes that “the tax base will be calculated, correcting, through the application of the precepts established in this Law, the accounting result.” In this sense, it is important to keep in mind that, With some exceptions, for an expense to be tax deductible it must have been accounted for.
Another concept close to the accounting result that reflects the profit and loss account are the flows of treasury (collections and Payments). Despite being close concepts, many differences arise. We can see it quite graphically in the cash flow statement incorporated into the normal annual accounts models.
He Statement of cash flows also part of the accounting result to calculate the amount of the net increase or decrease in cash. Next, he performs different adjustments and reclassifications. With them, it bridges the differences between both concepts by adding and subtracting what is necessary to transfer the result of the year to the cash flow. At the same time, it organizes the information in a way that expresses the main sources of entry and exit of money from the company.
How is a profit and loss account presented?
Both formats more employees are vertical and that of double column:
- In the double column, all income appears on the right and all expenses appear on the left. This format was used in the preparation of the annual accounts during the validity of the previous general accounting plan. Current plans apply the vertical format.
- In the vertical, first appears a figure related to the amount of sales or services provided. In the annual accounts models of the Spanish general accounting plans it is the net amount of turnover. Next, other income and expenses that have a relationship with each other are added.
In any profit and loss account format, we find different results or margins that show the difference between income and expenses of a certain type. Thus, in the models of the current general accounting plan, operating results are differentiated from financial results. The result before taxes is obtained as the sum of both, while the result for the year is calculated by subtracting the amount of taxes on profits.
On the other hand, the information presented in the profit and loss account can be used to reconstruct it for purposes unrelated to accounting obligations. For example, the calculation of ebitda It starts from a similar format, but from a different approach, since it is not a figure that must appear in the accounts that are deposited in the Commercial Registry nor is it subject, consequently, to mandatory rules for its formulation.
The profit and loss account is a reference point inexcusable in business management. Many calculations with interest in areas as diverse as fiscal, financial, planning and budgeting, control, etc. are based on the information contained therein. Furthermore, we must not forget the legal impact of the accounting result it reflects, especially in capital companies, where its application is one of the mandatory items on the agenda at ordinary general meetings of partners.
Fountain: SAGE
