A profit and loss (P&L) statement is a summary of an organization’s income and expenses over a period of time, enabling you to understand what drives profitability. These financial statements typically cover a year or a quarter, and reviewing them over time helps business owners and investors evaluate a company’s financial health.
To help you get familiar with P&L statements, we’ll review how they work, why these reports are valuable, and what a basic P&L statement looks like.
Definition and Examples of a Profit and Loss Statement
A P&L statement, also known as an “income statement,” is a financial statement that details income and expenses over a specific period. This report helps you understand what’s behind a company’s profitability by categorizing revenues and expenses. For example, you can see if a business spends more than it earns on production, and you can view operating profits separately from financing costs and taxes.
|Sample P&L Statement Q3 20XX|
|Cost of Goods Sold||$100,000|
|Selling and Operating Expenses||$50,000|
|General and Admin Expenses||$30,000|
|Total Operating Expenses||$80,000|
|Income Before Taxes||$295,000|
|Income Tax Expense||$103,250|
How a Profit and Loss Statement Works
As you move through income and expenses step by step, the story behind profitability (or losses) unfolds. The income statement starts with revenue and moves on to expenses that eventually result in the organization’s profit or loss.
Some P&L statements include a company’s earnings per share (EPS).
If any parts or materials are required, those costs typically go under cost of goods sold (COGS). The result is gross profit. Next, the statement subtracts any expenses necessary to run the business, such as payroll, utilities, maintenance costs, and other expenses. The result is operating profit. At this stage, you can tell how effective the company is at providing goods or services at a profit.
In addition to understanding the ability to operate at a profit, it’s crucial to know what the bottom line is after all taxes and interest costs. If an organization borrows money, excessive interest costs can wipe out any profits. By examining interest expenses, you can evaluate if companies are using debt wisely. Plus, taxes are a reality for many businesses, so you need to know how much after-tax profit remains after paying all necessary costs.
After subtracting everything—including input costs, operating expenses, financing costs, and taxes—you arrive at the net income.
Analyzing Profit and Loss Statements Over Time
A P&L statement is a snapshot of one period’s financial results. But that information might not be useful unless you understand the bigger picture. By reviewing how the P&L statement changes over time, you may be able to spot trends. For example, if COGS increases dramatically, that may indicate less profitability ahead (or just a temporary spike in input prices). Thus, it’s essential to view each P&L statement as one piece of the puzzle.
Other Financial Statements
A P&L statement provides valuable information about income and expenses. But for a complete view of an organization’s financial health, it’s wise to review other financial statements, as well.
With any financial statement, it’s essential to analyze how these reports change over time. It may also be helpful to compare statements from competitors and others in similar industries.
A balance sheet shows a company’s assets, liabilities, and equity. Assets, which appear on the left side of the balance sheet, are things the company can sell or use to produce revenue. Liabilities, on the right side, represent payments or obligations that may reduce profits. Finally, equity is the value of the company if you satisfy liabilities and have remaining assets.
Cash Flow Statement
Cash flow statements detail changes in cash levels. Since liquidity is important to keep businesses afloat, the ability to manage cash is critical. It’s easy to confuse the cash flow statement with an income statement. But the P&L statement details the financial concept of profits, which might not impact cash flow in the ways you expect. For example, depreciation might be an “expense” on the P&L statement, but it’s an accounting concept—not a cash flow. The cash flow statement focuses on actual payments and receipts.
- A P&L statement explains the income and expenses that lead to a company’s profits (or losses).
- The document proceeds from top-line revenue to the bottom line.
- It’s ideal to review changes in P&L statements over multiple periods.
- Additional financial statements can supplement the information in a P&L statement.