A P and L Statement, also known as an ‘income statement’ or ‘profit and loss statement,’ is a financial document that details the revenues, costs, and expenses of a company incurred during a specific period, generally a quarter or fiscal year.
The statement helps to understand a company’s ability or inability to generate profit by categorizing revenues and expenses.
Every public company issues three financial statements quarterly and annually. The profit and loss statement is one of those three statements. The other two are the balance sheet and the cash flow statement.
A P and L statement exhibits:
A P and L statement is generated quarterly and annually, so it helps an organization examine its financial health and ability to gain profits to identify the problems or flaws in the business strategy.
Moreover, the company can spot trends by analyzing the changes in the profit and loss statements of different years. For example, if the demand decreases and the cost of goods sold increases, it may indicate that the company will hit a fall in profitability.
The statement also helps to give an in-depth understanding of the company's expenses and cash flow, allowing the company to control and balance its strategies for future profitability and success.
A P and L statement is important because many companies have to complete it quarterly or yearly as mandated by the law or the associated membership.
Moreover, comparing profit and loss statements allow companies to:
An organization must add additional components besides revenues and expenses. The report must comprise of:
A company's revenue includes product sales, services, and non-operating revenues that are not directly linked to the company, such as the interest of accounts, rental incomes, etc.
It indicates the net revenue without the sales cost. It is also known as gross margin or gross income.
It indicates the total earnings after the deduction of the expenses. P&L mainly calculates net income. To do so, it just adds all the revenues and gross profits and then deducts the expenses and losses.
It includes all the operating costs, like the cost of goods sold (COGS), employee salary, taxes, commissions, utilities, and transport. Paying off interest also counts as an expense of the company.
It includes the losses in a one-time event, such as a court settlement or loan payment.
It only applies to a company with shareholders. It mainly calculates how much each shareholder will receive if the organization’s net profit distribution takes place.
An organization should prepare a P and L statement in one of two ways—the cash and the accrual.
The cash method or the cash accounting method is used when cash flows in as revenue and flows out as a company's liability. Small businesses commonly adopt this method to keep track of transactions and personal finances efficiently.
The accrual method calculates the revenue and expenses as earned or paid off. For example, even if a service or product payment hasn’t gone through, it is still recorded as revenue. The same is for any liabilities which are yet to be paid off by a company.
Nowadays, profit and loss can be calculated using software specially made for the purpose. If you still wish to learn, here’s how.
Subtract the total expenses of the company’s revenues for a particular set period. The formula for profit and loss calculation:
“P&L/Net Profit=Revenues-Expenses”
For a more detailed explanation, here are eight steps to help you calculate the profit and loss.
Using profit and loss calculating software is best for efficient and time managing work.
People make mistakes when filling out three financial documents because they may seem similar. Here are some common differences between the three.