An accounting question came up yesterday while I was preparing a compilation of year-to-date profit and loss statement for a new small business client. The business is just started and has some income to report but had incurred little actual expenses yet. The expenses were summarized simply listed as “Operating expenses” as a single line item on the profit and loss report. I questioned other CPAs on the appropriateness of this simplified format.(1)
In general, we know that profit and loss statements normally break out expenses into categories so it is no surprise that most CPAs feel that this convention should be followed. Yet the range of other responses was interesting so I am sharing them here.
To summarize the other comments from CPAs:
1) there is no specific professional requirement for a P&L compilation other than the statement must not be misleading,
2) the usefulness to the user should be a high priority in formatting and presentation of the statement,
3) breaking a small expense total into even smaller expense categories just for the sake of using categories might not really be meaningful to the user,
4) taking the time to break the report into expense categories gives more weight to my decision to be professionally associated with an admittedly unorganized accounting system for such a young business, and,
5) the most interesting comment of all:
“Walmart, the largest company in the US, only has the following 5 expense lines in their 19 line Consolidated Statements of Income:
Cost of Sales
Operating, selling, general and administrative expense
Interest, Capital lease and financing obligations
Provision for income taxes, current”.
(1) For other accountants who may be reading: the new business needs a compilation of the first quarterly P&L results only, not full financial statements. The taxpayer is Schedule C cash basis and the compilation is tax basis. There is no automated accounting system yet but credible financial data is available based on bank statement activity and receipts. Most, if not all, of these expenses will flow to line 27a “Other expenses” on the schedule C. I have no engagement on the tax or other accounting issues but have brought the expense category issue to the owner’s attention. So my sole issue here is about the compilation format, not about the need to get expenses categorized for other business or tax accounting purposes.
What a fascinating subject. How often do we really think about this? Not often, we are autorotoms on this kind of stuff. Great to share with accounting students. My students “what is the difference between revenue and income?” was the work of the devil.