How is a Profit and Loss Statement Useful to a Business?

Profit and Loss Statement/Income Statement
Profit and Loss Statement/income Statement. Jean Murray

What is a Profit and Loss Statement (P&L) or Income Statement? 

A P&L (Profit and Loss Statement) or Income Statement is a business report showing Net Income as the difference between Revenue and Expenses.

Examples: If a business has revenue of $250,000 and expenses of $150,000 its net income or net revenue on the P&L Statement is $100,000.

What Does a P&L Statement Look Like?

The P&L statement begins with a header. The header includes the name of the statement, the name of the company, and the ending date of the period of time the statement covers.

A typical time period might be a month or a quarter or a year. For example, the time line might read "For the month ending December 31, 2015," as in the example.

Some P&L statements also include a statement of whether cash or accrual accounting was used. 

The second part of the statement shows the income (revenue) for the time period. Note that there may be deductions to the income  for returns or discounts. 

The third part of the statement is a listing of all the expenses of the business for that time period. Traditionally those expenses are shown in alphabetical order. 

The fourth part of many P&L reports is a calculation of the percentage of each expense item to the gross income before expenses. This calculation is helpful when looking at P&L statements over time.  If the percentage changes (up or down), you can see how the increase or decrease in the expense affects the net income, and make adjustments if necessary.

 

Read more about how to prepare a P&L statement (income statement) and a pro forma statement. 

How is a Profit and Loss Statement Used by a Business? 

The P&L is used by businesses in three ways: 

1. As one of the financial statements in a business plan, for the purpose of showing profits of the business over time.

In this case, the P&L might be a pro forma (projected) document, for an application for a startup business loan. 

2. As a tool for internal analysis of the health of the business. As described above, the percentages of each expense to the gross income are useful in analysis. In other ways, some P&L statements compare figures for sales and expenses to budgeted figures, to show whether projected goals have been met. 

3. For taxes. A detailed P&L statement is prepared for an entire year, ending at the date of the end of the fiscal (financial) year, and it is used by the tax preparer to compile the income and expenses for the business tax return. Many businesses create a P&L statement that matches the income and expense categories of Schedule C (the small business tax return filed by small business owners as part of their personal tax returns.