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Profit and Loss Statement

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Transcript

Hello, welcome back to this lecture. My name is just like from big numbers. And in this lecture we're going to be talking about what is a profit and loss statement. So a profit loss statement is also known as a statement of financial performance. And this is quite different to the balance sheet, in that this statement shows how company's performance is over a period of time. So that's very different to the balance sheet that we've just previously talked about, which is looking at at a point in time.

The actual p&l is actually almost think of it like a movie camera that's measuring from one point in time to another point in time and really understanding almost like what is the the journey or the performance of that period of time and only in that specific period of time. Remember, we've talked about retained earnings and how that profit forms part of that retained earnings? Well, we're not interested in the prior years of how they perform, we're only interested in the current year. And so what actually makes up the p&l or profit loss statement, all the revenues, all the revenues that now they could be like sales, revenue, interest, interest, revenue, any kind of dividends that you've received, any, any other form of management fees, or anything that you've received as revenue. And your expenses can be quite extensive. We think about businesses that there are literally, there are dozens of different types of custom and these are sort of the core categories around salary, wages, utilities, travel, entertainment, rent, computers, depreciation, amortization, insurance, interest, and tax and licenses.

So that's really high level in practice these these categories Can can go down to the thout, literally to the thousands of different combinations, just because there's so many different ways that businesses like to break this down. So for example, depreciation can can be broken down into all of its subclasses of depreciation, like the actual motor vehicle depreciation, the computer depreciation, the furniture and fittings depreciation, and they can even go levels lower than that in practice. There's also a different interest sometimes this goes down to the various different types of interest based on the different facilities in practice. So, so really the expenses, both the nature of how they operate, if you remember from the previous lectures that this reduces owner's equity, they get debited. And there's only really a couple of other sides of the transaction for the expenses. Are they going to come out of your cash bank?

It's going to come out of your accounts payable or it's getting the win consume an asset, it's going to be coming from other pre payment or maybe accumulated depreciation account. So, but you can see there's only a certain number of combinations of where expenses can actually come from. And then finally, you get your, your net profit, or sometimes called operating profit, and if the before tax amount, and then there's the after tax amount. So this is how a p&l works in practice, there's different there's actually different levels, that you can actually report it in practice. So you can actually report at the very bottom level is generally called net profit. But if you report it without your interest and your taxes, it's actually considered to be called EBIT, which is earnings before interest in tax.

And if you then take it a step further and illuminate and that basically what that means is that you've basically just cut Along those lines, and pushed up below where the subtitle is. And what that means is you've taken your revenue, you've less these expenses down to the point where there's just no interest in tax. And then the next level is then to exclude depreciation and amortization, that's actually called EBIT da. And that's, again, where you take your revenue, less your cost of goods, less any kind of expenses, that you just then don't take away depreciation. you report it as EBIT da, then you take away your depreciation, amortization interest in tax to get a net profit, but it's just different levels of works report. Now, the reason why organizations do that is because usually for internal purposes, certain stakeholders are interested in those kind of figures for various different reasons.

So if you're a manager, for example, you may be a general manager of a division. You can't really control too much what how the company is, is funded through its interests and The taxes so therefore you're measured on your a bit on your a bit. And it just makes it a more accurate figure to be able to measure someone's performance on as opposed to interest in tax which really is out of their control. A lot of banks and external parties are quite interested in a bit, just because it shows more the operational performance as opposed to a lot of the depreciation and amortization interest in taxes non non operational to what the business actually does. So a lot of a lot of stakeholders are quite interested in that. And And so, that's the p&l.

Remember, it's it's just for that particular time period. So usually the wording on on a profit and loss statement is for the period ended. So it could be like for a financial year from say, first of July to 30th of June, is quite typical. reporting period, although across the world, different different companies might work off different kind of reporting structures. So some companies report on a calendar year as opposed like from a January to December period. Some countries work on a much year end, some work on a September year end, majority work on a junior end, which is a financial year, which majority of businesses do but there are certainly a lot of European businesses that work on December year ends, it's quite common as well.

So the end of the day for the period ended will be on a profit loss statement. Again, go to any kind of website of any company and you'll see a profit loss statement. The format is ever so slightly different. Just depending on whether you're they're reporting EBIT, EBIT, da different net profit before tax, their profit after tax, sometimes they call operating profit, which is the same as Net profit. And get this in this example here, I've also got sort of depreciation in cash, I mean, just I would really just exclude that for the purposes of this exercise. So really, we're just looking at L and profit, which is eventually going to, then the final profit after tax will be the amount that then gets transferred to our retained earnings balance on the balance sheet.

And so really, that's profit losses. What we're going to then now do is we're going to go through back to the the short feel automotive case study. And we're going to actually start producing a balance sheet and profit loss based on our adjusted trial balance. So we can get to a final position and actually create some statements and start reporting on this, the numbers. So we'll see you in the next lecture.

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