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What is P’n’L and what do we need to know about it?

In order to prevent you from getting lost in the variety of terms and concepts, SMPLR is here to enrich your financial vocabulary! Experience and practice are good but let’s add some theory to help you manage your finances better.

P'n'L stands for "Profit and Loss." It is a financial statement that summarizes the revenues, costs, and expenses incurred during a specific period to determine the net profit or loss of a business. The P'n'L statement is also known as the income statement, statement of earnings, statement of operations, or statement of income.

The P'n'L statement provides valuable information about a company's financial performance by showing its ability to generate profits from its core operations. It typically includes revenues from sales, gains or losses from non-operating activities, cost of goods sold, operating expenses, and taxes. By comparing revenues to expenses, the P'n'L statement reveals whether a company made a profit or incurred a loss during the period.

The P'n'L statement is an essential tool for businesses to assess their financial health, make informed decisions, and communicate their performance to shareholders, investors, and stakeholders. It is usually prepared on a monthly, quarterly, or annual basis and follows accounting principles and standards such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).

Generally Accepted Accounting Principles (GAAP) refer to the standard framework of accounting principles, conventions, and procedures that guide financial accounting and reporting in a specific country or jurisdiction. GAAP provides a set of guidelines and rules that ensure consistency, comparability, and transparency in financial reporting across organizations.

Here are some key features and principles of GAAP:

1. Relevance and Reliability: GAAP aims to provide financial information that is relevant to decision-making and reliable for users. Information should be timely, accurate, and faithfully represent the financial position and performance of the entity.

2. Going Concern Assumption: GAAP assumes that a business will continue to operate indefinitely unless evidence suggests otherwise. This assumption allows for the valuation of assets, liabilities, and financial results based on the entity's continued existence.

3. Accrual Basis Accounting: GAAP follows the accrual basis of accounting, which recognizes revenues when earned and expenses when incurred, regardless of when cash is received or paid. This principle provides a more accurate representation of a company's financial position and performance.

4. Entity Concept: GAAP treats a business entity as separate and distinct from its owners or shareholders. This principle ensures that the financial affairs of the entity are reported separately from personal finances.

International Financial Reporting Standards (IFRS) are a set of accounting standards developed and maintained by the International Accounting Standards Board (IASB). IFRS provides a globally recognized framework for financial reporting, aiming to enhance comparability, transparency, and understandability of financial statements across different countries and jurisdictions.

Here are some key aspects of IFRS:

1. Global Adoption: IFRS is used by many countries worldwide, including the European Union, Australia, Canada, India, and over 140 other jurisdictions. The goal is to achieve uniformity and consistency in financial reporting, making it easier for investors, analysts, and stakeholders to compare financial information across different organizations and countries.

2. Principle-based Approach: IFRS follows a principles-based approach rather than a rules-based approach. This means that it provides broad principles and guidelines that allow for judgment and interpretation by preparers of financial statements. The focus is on providing a true and fair view of the financial position and performance of an entity.

3. Fair Value Measurement: IFRS emphasizes the use of fair value measurement for certain assets and liabilities. Fair value represents the price at which an asset could be exchanged or a liability settled between knowledgeable and willing parties in an arm's length transaction. This approach provides more relevant and market-based information in financial statements.

4. Comprehensive Reporting: IFRS requires comprehensive reporting, including disclosure of significant accounting policies, management commentary, and other relevant information beyond the basic financial statements. This aims to provide a more complete understanding of the financial performance and risks faced by an entity.

5. Ongoing Development: IFRS is continually updated and revised by the IASB to address emerging issues, improve clarity, and align with evolving business practices. The IASB works closely with stakeholders globally to ensure the standards remain relevant and effective in a changing business environment.

It's important to note that while many countries have adopted IFRS, some jurisdictions may have their own local accounting standards or variations of IFRS.

With SMPLR your P&L monitoring becomes simpler than ever.

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