Statement of Economic Activity and the Profit and Loss
It all begins with an idea.
The Statement of Economic Activity and the Profit and Loss, (aka the P&L) are similar documents, but they serve different purposes.
Here's a detailed comparison of both.
The Profit and Loss
Definition: The P&L summarizes a company’s revenues and expenses during a specific period of time. This period of time is typically a fiscal quarter or year, but it can be whatever time you choose.
Components: The data elements that are used to generate a P&L are:
Revenue: Total income generated from the primary operations.
Cost of Goods Sold (COGS): Direct costs attributable to the production of goods sold.
Gross Profit: Revenue minus COGS.
Net Income: The revenue remaining after all expenses have been subtracted.
Operating Income: Gross profit minus operating expenses.
Purpose: The P&L report is used by management, investors, and analysts to assess the company's financial performance over that time period. This information is critical to making wise decisions about operations, investments, and financing.
Statement of Economic Activity
Definition: The Statement of Economic Activity is basically the same as the P&L, but it provides a slightly broader scope of financial performance. It does this by including additional data elements that are not typically part of the P&L Statement.
Components: The data that is used to generate a Statement of Economic Activity are:
Revenue: Total income generated from its primary sources.
Cost of Goods Sold (COGS): Direct costs required to deliver their programs.
Net Income: This is determined in the same way it is in the P&L.
Other Comprehensive Income (OCI): Includes items not included in net income, such as unrealized gains and losses on investments. Endowments are often a large part of a nonprofit’s revenue, now and in the future. Factors that impact their future value are a big part of making decisions about the present.
Total Comprehensive Income: The sum of net income plus OCI.
Purpose: The Statement of Financial Activity is used to provide stakeholders with information about an organization’s financial health. This information is critical to making wise decisions about current and future programs.
Key Differences
Scope:
The P&L Statement focuses on profitability through revenue and expenses.
The Statement of Economic Activity takes a broader view of revenue by including the OCI.
This helps the organization focus on fulfilling their Mission Statement and not their profitability.
Components:
The P&L Statement includes revenues, expenses, and net income.
The Statement of Economic Activity includes everything in the P&L plus items like unrealized gains/losses, revaluation surpluses, and other items.
Purpose:
The P&L Statement is primarily for assessing operational profitability.
The Statement of Economic Activity is for understanding the overall financial performance and includes non-operational gains and losses.
Users:
P&L Statement is used by management and investors.
The Statement of Economic Activity is used by stakeholders interested in the organization’s financial performance and economic activities.
In summary, both statements are crucial for a financial analysis of the business or organization.
The “P&L Statement” provides detailed insight into a “for-profit” organization’s ability to generate profits.
The “Statement of Economic Activity” gives a detailed insight into a nonprofit’s ability to remain financially sound into the future.