Profit and Loss (P & L) Statement

What is a profit and loss (P & L) statement?

A P & L statement, otherwise known as a profit and loss statement, is a financial report that summarizes revenue, costs, and expenses incurred over a fiscal quarter or year. It shows a business’s net income by subtracting total costs and expenses from total income and revenue.

This report is especially useful in measuring organizational performance, as it shows a business’s financial health and profitability.

Why is a profit and loss statement important?

A P & L statement is important if you have stakeholders in the business. It provides a clear picture of the business's financial performance and where it’s heading. A profit and loss statement also:

• Provides an understanding on how revenue and expenses stack up over time and across locations: P & L statements can help you understand where the costs are coming from, how to cut them, and how to maximize your net income.
• Helps 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 need to show potential investors or loan agents how they expect to make a profit over time.
• Assists with completing 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, “Profit or Loss from Business.”

What is included in a profit and loss statement?
A P & L 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 a P & L statement will feature:

• 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 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 P & L 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. 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 & 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 (the 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.

How does a company benefit from a P& L statement?

Generated both quarterly and annually, profit and loss statements help businesses examine their financial health and profitability over a period of time. And performing a financial health check can have a number of benefits, including helping to prepare for investment, risk mitigation, and improved decision-making, among many others. A finance check can also help you see how much money is truly coming in and 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.

Does a P & L statement show a business’s full financial state?

No, a profit and loss statement doesn’t show a business’s full financial state. To get a full picture of the financial situation, you should analyze other pieces of data. Looking at balance sheets and cash flow statements, along with P & L statements, can help identify other financial areas of a business.

Balance sheets can identify a company’s assets, liabilities, and equity, while a cash flow statement is in three parts. It looks at cash from operations, financing and investing. Looking at all of these statements together can help paint an accurate picture of a business’s financial position.