3 Components Of Financial Clarity
Source: American Express
The over-arching challenge most businesses have on their profit and loss statement is complying with the matching principle - matching revenues and correlated expenses in the correct period. First you need to recognize revenue when it is "earned." Even if a customer pays up-front for 3 years of products and services, the business will most likely need to spread that revenue proportionally over the entire 3-year arrangement. Second, the expenses incurred to generate those revenues need to be matched to the same period in which the revenue is recognized. This is often a complex process that differs slightly by industry. Once overcome, the profit and loss statement becomes a tremendous help in the quest for clarity.