In my opinion, a company faces a shutdown situation when it does not realize its losses for a long time span. A professional practice is that the losses and profits should be compared at the end of each year. This helps in the identification of mistakes. With the help of a profit and loss statement, all the expenditures of the company are recorded. Consider that you are running a company which manufactures paints. If your sales are less than your costs, the negative figure will be highlighted in your profit and loss statement. It is prepared annually and gives a snapshot of the entire financial year.
Every accountant needs to understand the key components of this statement. In addition to that, if you are working on an accounting research paper, the understanding requirement would increase. A profit and loss statement has a format and template. The first component calculated is the cost of goods sold. This component identifies the cost spent on running the plant and preparing the finished goods. If the company is running in profit, the figure of sales revenue is greater than the cost of goods sold. In addition to that, the difference gives a rough estimate of the profit. On the other hand, if a loss is occurring, the sales figure would be smaller than the cost of goods sold. If these figures are not compared and contrasted on annual basis, the company can face serious losses. In such situations, an organization has to liquidate its assets.