- A profit and loss statement (P&L), or income statement or statement of operations, is a financial report that provides a summary of a company’s revenues, expenses, and profits/losses over a given period of time.
- The P&L statement shows a company’s ability to generate sales, manage expenses, and create profits.
- It is prepared based on accounting principles that include revenue recognition, matching, and accruals, which makes it different from the cash flow statement.
Structure of the Profit and Loss Statement
A company’s statement of profit and loss is portrayed over a period of time, typically a month, quarter, or fiscal year.
The main categories that can be found on the P&L include:
- Revenue (or Sales)
- Cost of Goods Sold (or Cost of Sales)
- Selling, General & Administrative (SG&A) Expenses
- Marketing and Advertising
- Technology/Research & Development
- Interest Expense
- Taxes
- Net Income
Use of profit and loss account used for
- The profits shown in your profit and loss account are used to calculate both income tax and corporation tax. Failure to file either of these correctly can result in you paying added interest and penalties, so it’s important to get this report right.
- The P&L account takes revenues into account for a specific period. It also records any expenses or costs incurred by these revenues, such as depreciation and taxes.
- This can be used show investors and other interested parties whether or not the company made money during the period being reported.
Comparison Profit or Loss Between different Periods
- It is important to compare income statements from different accounting periods.
- The reason behind this is that any changes in revenues, operating costs, research and development (R&D) spending, and net earnings over time are more meaningful than the numbers themselves.
- For example, a company’s revenues may grow on a steady basis, but its expenses might grow at a much faster rate.
- Comparing one company’s P&L statement with another in the same industry that is similar in size can further help investors evaluate the financial well-being of a company.
- For example, doing so might reveal that one company is more efficient at managing expenses and has better growth potential than the other.
Types of Profit and Loss Statements
As noted above, a P&L statement may be prepared in one of two ways. These are the cash method and the accrual method.
Cash Method
The cash method, which is also called the cash accounting method, is only used when cash goes in and out of the business. This is a very simple method that only accounts for cash received or paid. A business records transactions as revenue whenever cash is received and as liabilities whenever cash is used to pay any bills or liabilities. This method is commonly used by smaller companies as well as people who want to manage their personal finances.
3
Accrual Method
The accrual accounting method records revenue as it is earned. This means that a company using the accrual method accounts for money that it expects to receive in the future. For instance, a company that delivers a product or service to its customer records the revenue on its P&L statement, even though it hasn’t yet received payment. Similarly, liabilities are are accounted for even when the company hasn’t yet paid for any expenses.
Difference between a P&L statement and a Balance sheet
A company’s P&L statement shows its income, expenditures, and profitability over a period of time. The balance sheet, on the other hand, provides a snapshot of its assets and liabilities on a certain date. The balance sheet is typically presented as of the last day of the company’s fiscal year. Investors use the balance sheet to understand the financial strength of the company, comparing the amount and quality of its assets against its liabilities.
