An Accounting Firm’s guide to Profit and Loss Statements
Business owners can successfully run a company by outsourcing their accounting requirements to leading accounting firms in Dubai. However, it is ideal for an entrepreneur to be familiarized with basic accounting essentials such as a Profit and Loss Statement (P&L) before seeking expert assistance. A P&L statement is one of the primary financial statements prepared by companies, which indicates the entity’s financial health. A P & L statement essentially shows a company’s revenues and expenditures over a specified period of time (usually over one fiscal year), which is why it’s highly important for your business growth.
In this article, you can learn some essential aspects of a P & L statement including its significance in your business. Read ahead to gain further insights on P&L statements:
What is a Profit and Loss Statement?
The P&L statement is one of three financial statements issued by companies quarterly and annually. The balance sheet and the cash flow statement are the other two. The P&L statement of a company summarizes the revenues, costs, and expenses incurred by the company during a specified period. Along with the balance sheet and the cash flow statement, the P&L statement provides you with an in-depth look at your company’s profitability. Accounting companies in Dubai can assist you with preparing robust P&L statements.
How do Profit and Loss Statements Work?
A P&L statement begins with an entry for the company’s revenue. This is known as the top line. P&L statements work by subtracting all of the company’s expenses from its total revenue. The expenses include the cost of goods sold, operating expenses, tax expenses, and interest expenses. The difference between the total revenue and the cost of doing business is the net income, also referred to as the profit or earnings or in IFRS language ‘Total Comprehensive Income’. In a P&L statement, this is known as the bottom line.
Why is it Critical to Compare Profit and Loss Statements?
Comparing a P&L statement helps you to identify financial trends and measure your company’s performance over time. You can compare P&L from different accounting periods from your records. This type of comparison is critical because a company’s revenues may grow steadily, but its expenses might grow much faster. You can also compare your company’s P&L statement with that of another company in the same industry, which has a similar size as your firm’s.
This type of comparison helps investors evaluate the profitability structure comparison of your company. This comparison can let you know which company is more efficient at managing expenses and has better growth potential among the two. You can outsource the help of accounting firms in Dubai to carry out efficient P&L statement comparisons.
How does a P&L statement Differ from a Balance Sheet?
The P&L statement shows your company’s income, expenditures, and profitability over a period of time. However, the balance sheet is a snapshot of the company’s assets and liabilities on a certain date. Typically, a balance sheet is presented as of the last day of the company’s fiscal year. Banks and investors may use a balance sheet to determine your company’s creditworthiness and availability of assets for collateral. And the P&L gives an idea of the profitability and the repaying capacity from the net profit.
What is the Significance of Profit and Loss Statements?
The following are some of the reasons that validate the significance of using a P&L statement:
To Assess the Profitability
Investors and analysts use the information from the P&L statements to assess the profitability of your company. They may also combine insights from the other two financial statements for this purpose.
To Make Informed Decisions
The information from the P&L statement can enable you to understand how the business fared over a particular period of time. The knowledge of how the company is performing in terms of revenue and expenses enables you to make much better financial decisions.
To Negotiate Better with Investors/Buyers
You get more power while negotiating with potential investors or buyers as up-to-date P&L statements enable you to show how your business is performing during the course of its operations. P&L statements can also be useful while luring new clients as you can show them your company is stable and reliable.
To File Tax Returns Properly
Apart from meeting all your tax obligations, an up-to-date P&L statement helps you to file accurate tax returns. A regularly updated P&L statement will give you all the necessary information when the time comes to file your company’s taxes. This is important as the UAE Corporate Tax has become effective from June 1st, 2023.
Best Accounting Firms in Dubai, UAE
Entrepreneurs looking to have an in-depth understanding of their company’s financial situation can get the services of the best accounting firms in Dubai such as Jitendra Chartered Accountants (JCA).
We can add value to your business as JCA has worked with companies of all sizes and all industries. Apart from providing accounting & bookkeeping services in Dubai, JCA helps companies meet key compliance requirements related to the UAE corporate tax, Value Added Tax (VAT), Economic Substance Regulations (ESR), Anti-Money Laundering (AML) and Ultimate Beneficial Ownership (UBO). Hire us and propel your company to greater heights.