Glossary of Human Resources Management and Employee Benefit Terms
What Is a Profit and Loss Statement?
A profit and loss statement, also known as an income statement or a P and L statement, is a financial report that shows a business’s net income by subtracting total costs and expenses from total income and revenue.
How Does a Company Benefit from a Profit and Loss Statement?
Generated both quarterly and annually, profit and loss statements help organizations examine their financial health and profitability over a historical period. How much money is truly coming in? How much money is going out?
A profit and loss statement looks at the bigger picture, which helps companies identify where they need to fine-tune their business strategy. In that way, businesses can stay in control of their future direction and profitability.
Why Is a Profit and Loss Statement Important?
Comparing several P & L statements allows companies to:
Understand how revenue and expenses stack up over time and across locations. Maybe you’re seeing a steady increase in your sales, but your transportation costs are increasing even faster, making your overall performance appear flat. Profit and loss statements can help you understand where the costs are coming from, how to cut them, and how to maximize your net income.
Plan for the future. New or prospective businesses will include a projected profit and loss statement as part of a business plan. While a new business might not have any real profits or losses to report, they will likely show potential investors or loan agents how they expect to make a profit over time.
Complete taxes. Established businesses that prepare profit and loss statements can also use the information in those reports to fill out their taxes. This is especially true for small businesses, as they have to fill out a Schedule C form, titled “Profit or Loss from Business.”
What Is Included in a Profit and Loss Statement?
A profit and loss statement shows a business’s revenues and expenses over time. But there are many different types of revenue and expenses an organization needs to track and record in their profit and loss statement.
Here are some of the key categories:
Revenue: This includes sales of products or services and recurring revenue that isn’t directly tied to your business operations, like rental income or interest from bank accounts.
Gains: These include one-time events, like selling off property or equipment, but should also be recorded as part of an organization’s profit.
Expenses: This includes all your operating costs, like the cost of the goods sold (COGS), employee wages, sales commissions, taxes, and administrative overhead (which ranges from paying rent on facilities and equipment to utilities and transportation). Just as interest gained is included in revenue, interest paid should also be included in your expenses.
Losses: Much like gains, these are one-time costs or events that represent a loss for the business, like paying a settlement in a lawsuit.
Net income: Also known as the “bottom line,” this is what a profit and loss statement calculates. To figure out net income, add up all your revenue and gains and then subtract your expenses and losses.
Additional categories may be relevant to your P & L statement, such as:
Interest expense and income: Interest expense is the amount of interest you pay on your loans. Interest income is money from certificates of deposit, money market accounts, and similar interest-bearing sources.
Income and other taxes: Income taxes include federal, state, and local taxes but not property taxes. Other taxes are operating expenses that are deductible.
Earnings per share (EPS): This applies to you if your business has shareholders, and it calculates how much money shareholders would receive if your business distributed its net income. You can calculate this by taking your total net income and dividing it by the number of outstanding shares.
How Do You Calculate Profit and Loss?
You can calculate profit and loss by subtracting your total expenses from your revenues over a set period.
P & L / Net Profit = Revenues - Expenses
This involves eight steps (though accounting software can automatically run a profit and loss statement for you):
Calculate your revenue.
Calculate the costs of goods and services your company has sold.
Subtract the costs of goods (value from step 2) from your revenue (value from step 1) to get your gross profit.
Calculate operating expenses (rent, travel, equipment, utilities, etc.).
Subtract operating expenses (value from step 4) from gross profit (value from step 3) to get your total operating profit.
Add additional income (interest income/dividends) to your operating profit to get your earnings before interest, taxes, depreciation, and amortization (EBITDA).
Calculate interest payments, taxes due, depreciation, and amortization.
Subtract interest payment, taxes due, depreciation, and amortization (value from step 7) from EBITDA (value from step 6) to get your net profit.
What Is the Difference Between P and L Statements and Balance Sheets?
Many people confuse P & L statements with balance sheets. While both provide historical financial data, they approach this information from two different perspectives:
A balance sheet illustrates what your company is worth. In other words, it looks at your company’s assets (what the company owns), liabilities (loans or money you owe to people or certain entities), and equity (value of your shares).
A P & L statement illustrates how your profitability has changed over time. It shows how your business has performed over a set period, and your balance sheet shows how this performance impacts the value of your business.