What is a Profit and Loss Statement?

A profit and loss statement (P&L statement), often called an income statement, shows a company’s profit or loss over a certain period of time. It is one of the most important financial statements used to analyze the financial health of a company. These statements include:

• P&L statement
• Balance sheet
• Statement of cash flow
• Statement of retained earnings

The P&L statement doesn’t provide all of the information needed to completely analyze a company’s financial situation, but it provides an important piece.

If you are creating a P&L statement yourself, we recommend using specialized accounting software. Check out our guide to the Best Accounting Software for Small Businesses to find the best option for you.

A P&L statement is used to calculate a company’s revenues and expenses over a specific time period and to calculate the company’s net profit or loss during that period.

Revenue

Revenue is the money a company makes from selling goods or services as well as from other potential sources. It is often referred to as a business’s “top line.” Different types of revenue include:

• Operating revenue - Money made from a company’s primary business activities, such as from selling goods or services.
• Non-operating revenue - Money made from activities outside of a company’s primary business activities, such as from interest-earning accounts or rental income from unused property the company owns.
• Gains - Money gained from non-recurring events, such as payments from a lawsuit or the sale of long-term investments or assets.

Expenses

Expenses are money flowing out of a company. Expenses can be broken down into different categories, including:

• Operating expenses - Expenses related to a company’s normal business activities, such as payroll, rent, utilities, advertising, and production costs. These generally make up the majority of a company’s total expenses.
• Non-operating expenses - Expenses not related to a company’s day-to-day operations, such as interest expenses on a loan.
• Losses - One-time expenses, such as lawsuits or losses on the sale of investments.

Profit or Loss

Commonly called the “bottom line,” the net profit or loss is the financial result when a business subtracts its expenses from its revenue. A positive number is a net profit, and a negative number is a net loss.

Profit and Loss Statement Formulas

Business owners, investors, and analysts use a few simple formulas when examining a business’s income statement. Each one of these provides a slightly different look at a company’s financials. They include:

• Net profit = revenue - all expenses
• Gross profit = revenue - cost of goods sales (COGS)
• Operating profit (earnings before interest & tax (EBIT)) = sales - COGS - operating expenses

The P&L statement is important because it shows if a company has earned or lost money during a specific time period. This is useful information to business owners, investors, analysts, and bankers.

If a business can show that it is profitable, that will help it get investments and lines of credit if needed. Also, breaking down a business’s revenue and expenses into specific categories can help business owners identify opportunities to increase revenue, lower expenses, or both.

The P&L statement and the balance sheet provide different pieces of financial information about a company, and from different perspectives.

A balance sheet gives a snapshot of a company’s financials at a specific point in time. It shows the total amount of assets and liabilities that a business has accumulated up to that point.

A P&L statement shows the profitability of a business over a period of time. It shows how much money a company has earned and how much it has spent over that period, whether it be for a month, a quarter, or a year.

Neither of these financial statements provide the whole picture of a company’s financial health, but they each give an important piece of information.