January 22, 2021


Accounting + Finance Blog

Business term: Statement of profit or loss

Business term: Statement of profit or loss

The term statement of profit or loss is coined from the International Accounting Standards (IAS) 1. Other possible names are a statement of profit or loss and other comprehensive income or statement of comprehensive income. The choice of a name depends on the individual company or firm. Also, the industry in which the firm can be traced.

A statement of profit or loss is one of the statements that form part of a financial statement. The aim of the statement is to provide information regarding the firm’s or company’s financial performance.

Definition of statement of profit or loss

A statement of profit or loss can be defined as one prepared and presented to users to declare the financial performance of the business concern.

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The term financial performance means changes that occur as a result of efficient use of resources (that is, assets) and claims to such resources that are liabilities. The differences between these changes resulted in profit or loss for the firm. An efficient and effective company will make a profit while an inefficient one result is a loss.

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What you need to know

There are two ways of presenting a statement of profit or loss and other comprehensive income.
1. The nature of expense method and
2. The function of expenses method

Under the nature of the expenses method, expenses are presented as they are incurred. Here, expenses relating to depreciation are recorded as they were and not allocated according to the department or offices in the organization that used the non-current assets. The format as provided by IAS 1 is shown below.

By function of expenses, these expenses are further classified into various departments including administrative and distribution expenses as well as the cost of sales. Depreciation Expenses will be allocated to each function or department of an organization.

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This method requires the use of judgment. In addition, the preparer must provide additional information regarding the nature of expenses. For example, in the case of depreciation, a schedule of depreciation will be provided as additional information. This method is also called the cost of sales method. The format is provided below.

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When choosing the title as a statement of profit or loss, the company must prepare a separate statement of comprehensive income.

A statement of profit or loss shows the profit after tax, which is further distributed to owners. However, a statement of comprehensive income states the total comprehensive income for the year under consideration. Such income is distributed among majority and minority owners.

Finally, a change in equity does not result in income or expenses.

Example of Statement of Profit or Loss from a listed Company

Below is a statement of profit or loss of Dangote Group. The statement is a consolidated type. View a statement of the financial position of Dangote Plc.

Business term: Statement of profit or loss

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