As an Accountant, we present different financial reports for different purposes.
To start with let’s look at what is Profit and Loss in accounting terms.
Profit is a financial gain, especially the difference between the amount earned(Sales) and the amount spent(expenses) in buying, operating, or producing something.
Loss is when expenses exceed the income or total revenue or sales
I believe you have heard an accountant talking of Balance Sheet, Profit or Loss Statement, Cash flow Statement and Management Accounts. These are some of the statements which we prepare periodically for financial reporting.
Accounting work involves working on historical events which took place during a particular period which we call financial year. In short a financial year is twelve month period used by government and businesses for tax, accounting and budget purpose.
Let me give an example of Profit or Loss Statement for the year. Within this report we include all sales and expenses which has been made and incurred during the year(12 months). We add all sales to come up with Total Sales figure, then deduct the total figure for all expenses relating to business. The difference between total sales figures and total expenses is either profit or loss.
You might have made so much profit at a particular point(some months) during the year then later incurred loss the in last month of the year. Perhaps this Loss could have been as a result of spending all the money in the bank to pay for expenses and purchase stock, whereas your sales are less than expenses. In this instance, you will be currently broke, yet in aggregate figuratively your financial statement will be reflecting profit. This is because we would have included all the profits earned during the year versus the loss for the year.
For example, Since March the beginning of the year your business is making R1000 loss because you are a start-up not making a lot of sales. The same happens for 9 consecutive months resulting in an aggregate loss of R9000. Then because of festive season sales picks up and you begin to make R1000 profit per month till year-end in February. In total R3000 will reduce total loss to R6000 at the end of the year. However, according to the accountant financial statements reflects the loss of R6000 while in your bank you will be having R3000 in cash. This because the bank account reflects the current balance at a particular date, on the other side financial statements reflect aggregated balances for a certain period of time.
This same may happen in the opposite whereby you have money in your bank but your accountant tells you that you made a loss. Your business may incur losses that exceed profit made in the current month.
Here in South Africa, most companies’ financial year starts on the 1st of March and ends on the last day of February. By looking at the financial statements at year ended 29 February 2020, it is a reflection of the business past events which commenced on 01 March 2019.
It is imperative that every business owner should have as much clear information from the accountant as possible to make informed decisions for the business.
I hope this was helpful.