What is a Profit and Loss Report used for?
To Calculate Tax
If a net profit is earned, this figure will be used towards calculating the Income Tax payable to the government.
This is done at the end of every financial year (every 12 months).
If the year end result is a loss, there will usually be no income tax to pay because losses are tax deductible but they are not so good for the day to day running of the business as it means the cash flow will be tight and it will be difficult to cover expenses.
For Loan applications
If the business is applying for a financial loan, the loan provider (like a bank) will want to see the applicant's Profit and Loss Statement to analyze if loaning money to the business is a viable step.
To check the cost of goods sold
To help the bookkeeper pin-point if the business is recouping its cost of goods sold. i.e. is the business on-charging to customers all the direct costs it incurred to complete a job?
Analyze Business Trading Trends
A chart of monthly summary figures taken from the Profit and Loss statement is useful for showing the trends of business trading, such as the rise and fall of income and expenses. This gives the owner an opportunity to analyze the activities of the business and investigate why, for example, income in one month was much lower than another month which leads to the next point.....
...As an aid to improving business operations
To help business management work out ways of improving business operations such as where to cut down on expenses.