Profit and Loss Account Statement (P&L Statement):
1. Profit = Sales – Costs
2. So, you basically have two entities: Sales and Costs.
The other names used to refer to Sales are: Fees, Income, Sales, Revenue, and Turnover.
The other names used to refer to Costs are: Expenditure.
3. Classification of Costs or Expenditure
Capital Expenditure: Purchase of machinery, property or anything that goes for some period of permanence.
Revenue Expenditure: Expenditure for the day to day running of the business.
Direct Cost: Costs which are directly involved in the production of one’s products.
Indirect Cost: Costs involved in the support processes like adminstration etc…(Also called Overheads.)
Fixed Costs: Rent, Insurance, Salary and other costs which are pretty much fixed.
Variable Costs: overtime wages, petrol, stationery and other costs that are variable.
NOTE: Capital Expenditure will not be shown in P&L Statement because the costs invested are for long term expenses and you will enjoy the fruits for many years. A P&L statement is essentially for the current year, so you will not put it in the P&L Statement. But, this will be shown in the Cash Flows Statement, which will be explained in further blogs.
a. Indirect labor- fixed costs could be variable under certain circumstances
b. Indirect materials- variable costs
c. Insurance on building- fixed costs
d. Overtime premium pay- variable costs
e. Depreciation on building (straight-line)- fixed costs
f. Polishing compounds- variable costs
g. Depreciation on machinary (based on machine hours used)- variable costs
h. Employer’s payroll taxes- variable costs
i. Property taxes- fixed costs
j. Machine lubricants- variable costs
k. Employees’ hospital insurance (paid by employer)- fixed costs
l. Labor for machine repairs- variable costs
m. Vacation pay- variable costs
n. Patent amortization- fixed costs
o. Janitor’s wages- fixed costs
p. Rent- fixed costs
q. Small tools- variable costs
r. Plant manager’s salary- fixed costs
s. Factory electricity- fixed costs
t. Product inspector’s wages- fixed costs
4. Income or Sales is classified as:
Income or Operating Income or Sales Income: Income from the main line of business.
Other Income: Income from the dividends (dividends of the stocks bought by this company from other companies)
Income from sale of assets
For the sick mills of Mumbai, other income is much higher than the income, which indicates things are struggling.
So, let us see what a Profit and Loss Account is:
There are two sections in a Profit and Loss Account: Income and Expenditure (names may change as put above)
Sales/Operating Income: 4350
Other Income: 120
Total Income: 4470
Mfg Cost of Goods Sold: 2400
Gross Profit: 2070
Overheads (Distribution, Selling etc…) 1450
PBDIT (Profit before Depreciation, Interest and Tax): 620 (Also called the Bottom Line, because the costs below this cannot be controlled by the company.)
PBIT: 545 (Generally used to compare two companies.)
Profit before Tax (PBT): 425
Profit After Tax (PAT): 255 (6% of the original)
The Profit After Tax is going to be distributed into Reserves and the remaining amount will be carry forwarded to the Balance Sheet.
If your Gross Profit is huge, but your PAT is very less like above then it shows that the company is a TOP-HEAVY company.
If your Profitability is huge, then it is called CASH COW.
For better understanding you may refer to any companies profit and loss statement. Although you may see some extra components, the essence will be the same. For example, some companies may show Dividend Income seperately from Other Income and some of them may merge both and show as Other Income. Similarly, some may show the salaries seperately and some may not. But, the key points are the bolded ones above.
We will learn more about Balance Sheet in the next blog.