A profit and loss statement is a part of the financial statements prepared by the company to summarize its revenues, costs, and expenses for a period. The information is vital not only for its shareholders but also its stakeholders and potential investors.
The modern-day P&L is an amalgamation of the trading and the profit and loss account that has been traditionally prepared. Irrespective of whether you are an MSME or a large entity, it is mandatory for you to draw up your profit and loss statement.
This article discusses steps to prepare a profit and loss statement for a company in Singapore.
Why prepare a P&L?
A profit and loss statement gives you an overview of the company’s financial performance. So the first reason to prepare is to find out if the company is in profits and making money.
Regularly preparing it ensures that you have insights regarding the company’s revenues and its growth. In addition, it also helps you keep track of the expenses and informs you of the need to curtail or optimize them.
Another reason to prepare a P&L is that ACRA (Accounting and Corporate Regulatory Authority) mandates it. Therefore, every company operating in Singapore needs to prepare and submit it within the due date as part of its annual return.
Steps to prepare a profit and loss statement
Most companies in Singapore resort to outsourcing the preparation of their financial statements, including the P&L. It gives them peace of mind and ensures a hassle-free preparation process.
In case you are not using any of these services, here are the steps to do it yourself –
Start by ascertaining all your revenue streams through which funds have flowed in for the said period. You can use the general ledger and cash account to confirm the same.
In addition, care should be taken that you are only considering revenues generated/received in the given period (depending on accrual/cash basis of accounting). If there are multiple streams, make sure you bifurcate revenue generated from each.
Ascertaining cost of sales
Now that you have the revenue in place, the next step is to ascertain the cost of sales for the period in contention.
It will include the cost incurred to purchase raw materials and services required to convert them into final sellable products/services. For this, you can go through the debtor accounts, purchase accounts, and general ledger entries.
Calculate indirect expenses and incomes
Once you have the core business sorted, the next part is to ascertain all the indirect costs and incomes generated during the period in contention. The combination of general ledger and cash account is the best way to figure out indirect expenses and revenues and account for them separately.
Calculating interest, depreciation, taxes, and amortization
In all likelihood, the company will have sheets prepared to showcase the interest, depreciation, tax, and amortization for the period. If you want to cross-verify the same, you can check the general ledger to ascertain that the same amount has been reflected in the books of accounts.
Calculating EBDIT for the period
EBDIT or earnings before depreciation, interest, and tax represent profit/loss before taking tax and cost of capital into consideration. You can calculate it by removing the depreciation, interest, and tax figures from the net profit for the period.
EBT or earnings before tax is a key figure to inform you about a business’ overall performance and its ability to generate profits after settling all its business-related outflows. This figure can be reached by reducing depreciation and interest expense from EBDIT.
It is the step why a P&L is primarily prepared. Once you have listed all the incomes and expenses in their order, the last step is to determine whether the company made some money or not. Calculating the net profit helps you evaluate it.
A profit and loss account is an integral part of every company’s financial statements. It provides insights into the organization’s financials and performance. Especially for small businesses, it is helpful for owners in keeping a tab of operations and making timely adjustments.
The article is a part of our comprehensive series on “Profit and Loss Statement”