The Profit and Loss Statement, Essay Example

Revenue and expenses are two components of business equity. While revenue means the money or assets gained by a business in exchange for its product, expenses mean the money and assets spent on the necessary resources to manufacture or sell the product. Therefore, in case revenues are bigger than expenses, the business makes profit. However, in case expenses exceed revenue, the business is at a loss.

Expenses are classified on the income statement. Although specific companies or industries may have slightly different classifications, there is a universal set of categories. The first category is the Cost of Goods Sold. It comprises expenses immediately related to the company product such as inventory valuations, shipping and freight etc. The second category is called Operating Expenses and includes expenses incurred in the process of running a company such as all kinds of taxes, office expenses, advertising, supplies, postage, maintenance costs, mortgage or rent of facilities, utilities and professional fees. The category of Non-Operating Expenses includes expenses not associated with operation such as corporate income taxes which stands out because it is not paid until all operations for the accounting period are finished.

Operating Expenses is traditionally the largest category and comprises the greatest number of accounts.

A profit margin is an estimation of profitability calculated by dividing net income by revenues. The profit margin shows what of sales a company can really regard as profit. Calculating the profit margin gives a more objective picture of how successful the company is. First of all, it allows to weigh earnings against costs. Secondly, it is essential for analyzing the competitive environment by comparing profit margins of different companies.

References

Ohio State University Fact Sheet. The Profit and Loss Statement: What Does It Mean? Retrieved June 17, 2010 from http://ohioline.osu.edu/cd-fact/1153.html

Investopedia. Profit Margin. Retrieved June 17, 2010 from http://www.investopedia.com/university/ratios/profitmargin.asp