The Profit and Loss Statement (P&L) is a statement which shows the total income and expenditure of a business. It is also commonly known as the Income Statement.
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The profit and loss statement (P&L) is a financial summary of the revenues/profits and expenses/losses of a business organization during a particular period of time. Through the P&L or Income Statement, a business analyses its ability or inability for generating profit by decreasing expenses and/or increasing revenue. It is otherwise also known as the statement of operations, earnings statement, expense statement, and statement of income or financial results.
Every business quarterly or annually issues four financial statements: the income statement, the cash-flow statement, the balance sheet, and the notes to accounts. The income statement shows financial results of an organization and the cash-flow statement shows cash inflow and outflow for the given period of time. The balance sheet shows a snapshot of what the organization owns and owes at that particular time. Under the accrual accounting method, the business can log expenses and income when they occur irrespective of whether related cash is paid or received. Therefore, comparing income statement with cash-flow statement is vital.
The main purpose of preparing a P&L statement is to provide a summary of profits and losses of a business to all the stakeholders, i.e. those members who are linked with it directly or indirectly. These may include investors, banks, board of directors, shareholders, competitors, etc. Non-profit organizations may instead prepare a statement of activities showing their source of funds and how they utilize them.
Comparing income statements from different periods of accounting is important. The changes in operating costs, revenues, R&D expenditure, and net earnings prove to be extremely meaningful. For instance, the growth rate of organizational revenue may be slower than that of its expenses.
P&L statement can be used for calculation of various metrics such as operating profit margin, gross profit margin, net profit margin, and operating ratio. Along with the cash-flow statement and balance sheet, the income statement will provide a detailed overview of the financial performance and position of the business organization.
The P&L statement follows a general format. It starts with the top line which includes a revenue entry. It subtracts the business costs including operating expenses, cost of sold goods, interest expenses, and tax expenses. The bottom line includes the difference or net income, which is also referred to as earnings or profits.
Under accrual accounting method, the expenses and revenues which are reported on the profit and loss statement will be:
- Revenues: Like sales, service fee, etc. which the business earned in the accounting period
- Expenses: Like salaries, rent, cost of sold goods, etc. which match the reported revenues or incurred in the accounting period.
The bottom line of P&L statement will be shown as the net income which will include the net amount of reported profits, losses, revenues, and expenses.
Two methods can be used to prepare an income statement:
- Subtract expenditure from income for evaluating profit or loss for a particular time period; Or,
- Calculate gross profit first, then evaluate general expenses and operating expenses, calculate operating profit next, then calculate profit before taxes, and lastly calculate profit after taxes for summarizing net income of the organization.