Profit & Loss (P&L) Statement
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 generated by a company. 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.
The profit & loss statement is also known as the:
The basic equation for a profit & loss statement is: Revenues – Expenses = Profit.
Why Do P&L Statements Matter?
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, and that makes the P&L essential.
Revenues are used to pay expenses, interest payments on debt, and taxes. After the 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 they are spending more than they earn (also known as being company ‘in the red’).
Profit and Loss Statement Template
Regardless of the industry, profit and loss statements are all organized the same way with 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.
How to Prepare a P&L 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 Investing Answers free template.
Profit and Loss Statement Example
Here is a profit and loss statement example created using Investing Answers P&L template:
|Profit & Loss Statement for Company Y, Inc.|
|for the year ended December 31, 2020|
|Cost of Goods Sold||-$20,000.00|
|Utilities $ 5,000||$5,000.00|
|Depreciation $ 5,000||$5,000.00|
|Total Operating Expenses||-$30,000.00|
|Operating Profit (EBIT)||$50,000.00|
|Income before taxes (EBT)||$40,000.00|
|Number of Shares Outstanding||30000|
|Earnings Per Share (EPS)||$1.00|
P&L Statement 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. Each report shares some of the same line items, like revenue, expenses, and profit.
The main difference is that balance sheets also include liabilities, equity, and assets to illustrate a clearer picture of resource management. While the P&L focuses only on a company’s profit (or lack of profit), it doesn’t include these components.
Tips for Effective P&L Management
When you need to know whether your business is profitable, you’ll turn to the profit & loss statement. Use this statement to answer important questions about business profits like:
- Do you generate enough profit to cover expenses?
- Do you have enough money each period to pay yourself, your employees, and shareholders?
- How does your current P&L compare to past P&Ls? Has anything changed? Did this change increase or decrease your 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 the Profit and Loss Statement Relates 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 the stock and bond prices:
- Operating profit (EBIT) is the source of debt repayment, and if a company can’t generate enough EBIT to pay its debt obligations, it will have to enter bankruptcy or sell the company. The company will go under and so will the stocks and bonds.
- 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 will plummet. If a company is healthy and growing, higher stock and bond prices will reflect the increased availability of profits.
Please note that earnings/net income are not the same as cash flow. It’s possible for a company to be profitable on their 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
InvestingAnswers strives to help you build and protect your wealth through education. This is why our experts 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 Calculate Profit & Loss?
There are several components to a profit and loss statement, but the simplest way to calculate profit and loss is Income- Expenses = P&L.
- 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.
Q: How Do You Analyze a Profit and Loss Statement?
Here are a couple of examples of ways to analyze a P&L statement:
- 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 and help highlight potential problem areas.
- Cost of Goods Sold. 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 sacrificing on your good or service (thus generating more revenue).
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