Profit-and-loss statements helps businesses analyze past periods of operations and decide what they will do about the future. By the time profit-and-loss statements are generated, the company has already chosen a particular strategy and followed it for a quarter or annual period. The profit-and-loss analysis is a look back to see how well that strategy worked and the ways in which it actually affected the sales of the company. There are typically two statements created, a normal profit-and-loss version and a profit-and-loss appropriation account.
The profit-and-loss account is created to tally the total sales and expenses of the business and show what kind of a profit a business made, usually for a year-long period. It resembles the income statement and the cash statement, but focuses primarily on the sales portion of the business. Final sales figures give a starting balance and are balanced by purchases, cost of sales and other miscellaneous costs related to sales, until a gross profit number is created.
Use of Profit-and-Loss Account
The profit-and-loss account is primarily made of information that repeats, in greater detail, in more official statements like the cash-flow statement and the income statement. In fact, income statements may be referred to as profit-and-loss statements. But the goal of a profit-and-loss account is to combine all sales information into one column and quickly produce a bottom-line figure for gross profits apart from taxes and financing activities, a fast way to analyze overall productivity.
The profit-and-loss appropriation account is much different from the original profit-and-loss account. Once the first account has been created, the business must choose what to do with any extra earnings the business has created (as long as there is not a loss). Some money will be transferred into new investments and business growth accounts. Some will be used for bonuses. A portion of earnings will be distributed as dividends to the shareholders. The appropriation account shows what portion of earnings will be used for each of these activities.
Uses of Appropriation Account
The appropriation account is used within the business to tally earnings and match earnings to predetermined strategies for spending profit, but it has an important purpose outside the company as well. Investors can look at the appropriation account and see at a glance how much money the company is making and what kind of a dividend to expect, as well as how much of the company profit will be used for business growth, important factors when making an investment decision.