Legal Definitions - profit-and-loss account

A profit-and-loss account, often referred to as an income statement, is a financial report that summarizes a company's revenues, costs, and expenses over a specific period, typically a quarter or a year. Its primary purpose is to show whether a business made a profit or incurred a loss during that time by detailing all income generated and all expenses incurred.

Here are some examples to illustrate this concept:

• Imagine Maria, who owns a local artisanal coffee shop. At the end of the year, she compiles a profit-and-loss account to understand her business's financial health. This report would list all her sales from coffee and pastries (revenue) and then subtract all her expenses, such as rent, employee wages, coffee bean purchases, milk, and utility bills. By comparing her total revenue to her total expenses, the account reveals whether her coffee shop made a net profit or suffered a net loss over the past twelve months. This helps her decide if she needs to adjust prices or reduce costs.

• Consider "Tech Innovations Inc.," a publicly traded software company. Every three months, the company releases its quarterly profit-and-loss account to its shareholders and the public. This document details the revenue generated from software subscriptions and new product sales, as well as operating expenses like research and development, marketing, and administrative costs. Investors closely examine this report to see if the company is growing its revenue, managing its expenses effectively, and ultimately increasing its profitability, which can influence their decision to buy, hold, or sell the company's stock.

• Think of "Green Energy Solutions," a startup developing solar panel technology, which is seeking a new round of investment. When presenting to potential investors, the company's founders would provide a profit-and-loss account for the previous year. This statement would highlight the revenue earned from early sales or pilot projects, alongside significant expenses like engineering salaries, material costs for prototypes, and patent application fees. Even if the startup is currently operating at a loss, the account helps investors understand the scale of its operations, its burn rate, and its potential path to profitability once its technology is fully commercialized.