5.1 Profit & Loss Accounting

The profit and loss account (P&L) and the income statement are period accounts. They refer to a specific period (day, month, year). The profit is determined as the balance between the expenses and income or costs and revenues incurred in the period. By breaking down the components affecting profit or loss in the income statement, the sources of profit or loss become visible.

The profit and loss statement shows the earnings situation and profitability of the company. The result is the profit or loss. A profit increases the equity capital and thus increases the profitability. A loss that has to be absorbed consumes the capital.

The profit and loss statement is prescribed for reasons of commercial and tax law. The profit also serves as the assessment limit for taxes. The legal regulations for the P&L are in the German Commercial Code (HGB).

The calculation parameters for the P&L are "expenses" and "income". An expense consumes capital, an income increases capital. In contrast to liquidity planning, which aims at planning and securing cash, the P&L calculates increases or decreases in assets in the course of the business year.

The P&L must be carried out annually. An accrual of expenses and income shall be made at the end of the year. If a product or service is sold in the current financial year, the revenue from the sale shall be allocated to the current year, even if payment is delayed in the next financial year.

Profit can refer to the entire entrepreneurial success, to cost accounting-related sub-areas (department, profit centre, locations), to neutral earnings or to financially-related success. Depending on the need for consideration, different calculations result.

Types of profit:

Term	Calculation	Outline criterion
Company profit	Income- Expenses	= Part of corporate accounting
Total profit or operating profit	Services - Costs	= Part of cost accounting
Surplus	Expenditure- Revenue	= Part of the financial tax bill

 

Business profit or the total profit of a business is the difference between income and expenses. Profit in the true sense is the "entrepreneurial profit" or "profit" that would remain as profit after deducting entrepreneurial wages, return on equity and risk premium.

Total profit or operating profit includes as cost components the entrepreneur's salary as well as interest on equity capital, insofar as these are perceived by the entrepreneur.

In the calculation of taxable profits, surplus is the part that remains after deduction of all taxes. In financial accounting, surplus is the part that secures liquidity (solvency).

The determination of profits for merchants who are not obliged to keep accounts (sole traders, freelancers) is carried out by means of the income-surplus account. All income and expenses are taken into account. The profit or loss results from the difference between operating income and operating expenses. The tax consideration takes place within the framework of the Income Tax Act as personal profit.

Example: Revenue surplus account

 

	Operating income 2019	100.000 €
./.	Operating expenses 2019	60.000 €
=	Profit 2019 (net profit for the year)	40.000 €
	Operating income 2020	120.000 €
./.	Operating expenses 2020	135.000 €
=	Loss 2020 (net loss for the year)	- 15.000 €

 

An income statement can be regarded as a preliminary stage of a profit and loss account. Like the profit and loss account, it is to be prepared monthly and with annual totals. The types of costs differ. 

 

Note on the business plan:

Schemes of a revenue and profit account and a profit and loss account (P&L) are shown below. They contain cost items that do not occur in every company. Nevertheless, the aim of the list is to know them as cost items.

The invoices used in the business plan should relate individually to the facts of the business. The individual accounts should be explained and presented in such a way that a third party can understand them.