Profit & Loss Statement (P&L)
What Is P&L?
Profit and loss (P&L) statements are one of the three financial statements used to assess a company’s performance and financial position. The two others are the balance sheet and the cash flow statement.
Profit and Loss Statement (P&L) Meaning
The profit and loss statement summarizes all revenues and expenses a company has generated in a given timeframe. This summary provides a net income (or bottom line) for a reporting period. The P&L reporting period can be any length of time, but the most common are monthly, quarterly, and annually.
A P&L statement is also known as:
Why Are P&L Statements Important?
Simply put, the profit & loss statement shows whether a company is making money or not. All companies need to generate revenue to stay in business, making the P&L statement essential.
Revenues are used to pay expenses, interest payments on debt, and taxes. After all costs of doing business are paid, the remaining amount is called net income. Net income is theoretically available to shareholders, however, the company will often keep these earnings for future investment instead of paying out dividends.
Companies don’t always have a positive net income at the end of a P&L. If a company is suffering a ‘loss’, this means that it is spending more than it earns (also known as being ‘in the red’).
How Do You Calculate Profit and Loss?
There are several components to a profit and loss statement, but the simplest way to calculate profit and loss is to:
- Add up all income (revenue)
- Add up all of the expenses (e.g. COGS, operating expenses, interest, taxes)
- Subtract the difference between the two
There are plenty of accounting software applications that can help you generate a basic P&L statement. This is especially useful for small business owners who aren’t ready to hire an accountant yet.
The basic profit & loss statement formula is:
How to Create a Profit and Loss Statement
A profit & loss statement can be prepared by a bookkeeper, accountant, or accounting software (like Quickbooks). You can always prepare your own profit & loss statement using the InvestingAnswers free profit template in Excel.
Statement of Profit and Loss Formula
Regardless of the industry, each example of a profit and loss statement the statement of profit and loss format involves five main sections:
- Total Revenue (Income)
- Cost of Goods Sold (COGS)
- Expenses (including operating expenses)
- Other Income/Expenses (including taxes and earnings on shares)
- Net Income
Each section has a line on the report for the category and subcategory.
Profit and Loss Statement Example
The following profit and loss statement sample covers one calendar year:
Total Revenue $100,000
Cost of Goods Sold ($ 20,000)
Gross Profit $ 80,000
Utilities $ 5,000
Depreciation $ 5,000
Total Operating Expenses ($ 30,000)
Operating Profit (EBIT) $ 50,000
Interest Expense ($ 10,000)
Income before taxes (EBT) $ 40,000
Taxes ($ 10,000)
Net Income $ 30,000
Number of Shares Outstanding 30,000
Earnings Per Share (EPS) $1.00
Profit and Loss vs. Balance Sheet
Profit and loss statements summarize the money that’s coming in and going out. The balance sheet provides a snapshot of the entire company’s financial position, with each report sharing some of the same line items (e.g. revenue, expenses, profit).
Balance sheets, however, illustrate a clearer picture of resource management by including liabilities, equity, and assets. The P&L doesn’t include these components and only focuses on a company’s profit (or lack of profit)
When you need to know whether your business is profitable, you’ll turn to the P&L statement to answer important questions about business profits like:
- Does the company generate enough revenue to cover expenses?
- Does the company generate enough money each period to pay its employees and shareholders?
- How does the current P&L compare to past P&Ls? Has anything changed? Did this change increase or decrease net income?
You’ll want to keep records of your profit & loss statements for reference. You can also take these statements to an accountant for suggestions about improving your bottom line.
How P&L Helps Investors
Anyone interested in active investing or picking stocks should know the financial health of a company. This includes the profit and loss statement because profitability relates to stock and bond prices as it is factored into the P/E ratio (price over earnings).
How Profit and Loss Statements Relate to the Market
A company’s ability (or inability) to generate earnings over the long term is the key driver of stock and bond prices. Let’s look at two line items on the P&L and how they relate to stock and bond prices:
Operating Profit (EBIT)
Operating profit (EBIT) is the source of debt repayment, and if a company can’t generate enough EBIT to pay its debt obligations, over the long run it might have to enter bankruptcy or sell the company.
Net income is the source of compensation to shareholders (owners of the company). If a company cannot generate enough profit to compensate these owners for the risks they’ve taken, the value of the owners’ shares may plummet. If a company is healthy and growing, its increased profits will typically lead to higher stock and bond prices.
Please note that net income isn't the same as cash flow. It’s possible for a company to be profitable on its profit & loss statement but not generate cash flow (and vice versa). To accurately view a company’s cash flow, you will need to examine its statement of cash flows.
Ask the Experts About Profit and Loss Statements
At InvestingAnswers, all of our content is verified for accuracy by certified financial experts. Our experts also take the time to answer your questions at the end of each article.
Q: What Are Retained Earnings?
Retained earnings are the cumulative income that a company has earned and is retained in the business. That means they have not been distributed to shareholders as dividends or used for other purposes. The decision for a company to retain earnings is complicated as owners (or shareholders) often expect certain dividend payouts. Retained earnings are reflected on the balance sheet as owner’s equity.
Q: How Do You Analyze a P&L Statement?
Here are a couple of examples of ways to analyze a P&L statement:
1. Year over Year
Looking at year over year numbers (or often the same quarter from the previous year) provides an easy way to compare trends on your P&L. This will indicate ways in which your sales are improving or perhaps costs increasing. This can help you highlight potential problem areas.
2. Cost of Goods Sold
The cost of goods sold should be proportionate to sales, though is also tied to profit margins. You should also see if there is a way to reduce costs without making sacrifices regarding your good or service (thus generating greater gross profits).
Table of Contents
- What Is P&L?
- Profit and Loss Statement (P&L) Meaning
- Why Are P&L Statements Important?
- How Do You Calculate Profit and Loss?
- How to Create a Profit and Loss Statement
- Statement of Profit and Loss Formula
- Profit and Loss Statement Example
- Profit and Loss vs. Balance Sheet
- P&L Management
- How P&L Helps Investors
- How Profit and Loss Statements Relate to the Market
- Ask the Experts About Profit and Loss Statements