What Is a Profit and Loss Statement (P&L)?
The profit and loss (P&L) statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period, usually a fiscal quarter or year. The P&L statement is synonymous with the income statement. These records provide information about a company's ability or inability to generate profit by increasing revenue, reducing costs, or both. Some refer to the P&L statement as a statement of profit and loss, income statement, statement of operations, statement of financial results or income, earnings statement or expense statement.
P&L management refers to how a company handles its P&L statement through revenue and cost management.
Understanding a Profit and Loss Statement (P&L)
The P&L statement is one of three financial statements every public company issues quarterly and annually, along with the balance sheet and the cash flow statement. It is often the most popular and common financial statement in a business plan as it quickly shows how much profit or loss was generated by a business.
The income statement, like the cash flow statement, shows changes in accounts over a set period. The balance sheet, on the other hand, is a snapshot, showing what the company owns and owes at a single moment. It is important to compare the income statement with the cash flow statement since, under the accrual method of accounting, a company can log revenues and expenses before cash changes hands.
The income statement follows a general form as seen in the example below. It begins with an entry for revenue, known as the top line, and subtracts the costs of doing business, including the cost of goods sold, operating expenses, tax expenses, and interest expenses. The difference, known as the bottom line, is net income, also referred to as profit or earnings. You can find many templates for creating a personal or business P&L statement online for free.
It is important to compare income statements from different accounting periods, as the changes in revenues, operating costs, research and development spending, and net earnings over time are more meaningful than the numbers themselves. For example, a company's revenues may grow, but its expenses might grow at a faster rate.
Structure of the Profit and Loss Statement
A company’s statement of profit and loss is portrayed over a period of time, typically a month, quarter, or fiscal year. The main categories that can be found on the P&L include:
- Revenue (or Sales)
- Cost of Goods Sold (or Cost of Sales)
- Selling, General & Administrative (SG&A) Expenses
- Marketing and Advertising
- Interest Expense
- Net Income
Advantages Of Profit And Loss Account
The main advantages of profit and loss account are as follows:
1. To Obtain Net Result
Profit and loss account gives the actual information about net profit or net loss of the business for an accounting period. So, it is very useful to know the financial condition of the firm.
2. To Know Total Expenses
Profit and loss account gives the actual information about indirect expenses.
3. Determination Of Ratio
Profit and loss account serves to determine the ratio between net profit to sales and the ratio between net profit to operating expenses. It helps to understand the operational efficiency of the firm.
Profit and loss account helps in controlling indirect expenses by providing important information about these expenses.