Profit and Loss (P&L) Statement Defined (2024)

No financial metric is an island. A business may have achieved record-breaking sales lastquarter — an amazing accomplishment — but if its expenses also reached anall-time high,then the company may be no more profitable than it was the quarter before. For thatinformation, internal management, and external parties, such as investors and lenders, turnto the business’s profit and loss (P&L) statement. One of three main financialstatements — along with the balance sheet and the cash flow statement — theP&L includesa business’s revenue, expenses, and net income, among other key financials, for agivenaccounting period. Practically speaking, the P&L statement helps demonstrate acompany’sresults of operations and operational efficiency, which can be useful for predicting futuresuccess.

What Is a Profit and Loss Statement?

A profit and loss statement, formally known as an income statement orsimply as a P&L, tracks the amount of profitthat remains after a business subtracts all of its costs from its revenue during a specificaccounting period, typically monthly, quarterly and annually. Profit is also referred to asnet income or net profit andappears on the last line of a P&L —hence another nickname: the bottom line. But between total revenue and net income is otherimportant financial data that not only can help explain business performance but alsoidentify areas of strength and those in need of improvement. Public companies are requiredto file their profit and loss statements with the U.S. Securities and Exchange Commission inaccordance with Generally Accepted Accounting Principles (GAAP), but even private businessescan benefit from tracking this financial data.

Key Takeaways

• A profit and loss statement includes a business’s total revenue, expenses, gains,andlosses, arriving at net income for a specific accounting period.
• Management analyzes a P&L to determine how to increase profitability by increasingrevenue, lowering costs or both. A P&L is also a useful tool for lenders andinvestors that are evaluating a business for a loan or investment.
• A profit and loss statement is prepared using one of two accounting methods: cash oraccrual.

Profit and Loss Statement Explained

A profit and loss statement demonstrates the results of operations for a fiscal period,reflecting revenue, expenses, and profitability. When revenue exceeds expenses, the resultis net income, commonly called profit. The higher its profit, the better thebusiness’sability to grow, invest in operations, attract financing, receive loans, and rewardshareholders. When costs surpass revenue, it’s called a net loss.

Profit is calculated by adding and subtracting various expenses and income from acompany’stotal revenue, which is also known as the top line because it appears at the top of theP&L. The items deducted from revenue are the cost of goods and services(COGS), operating and nonoperatingexpenses, and taxes. Non operating income — such as interest income from bank accounts— isadded to the total amount. The result is the company’s profit orloss.

Only publicly traded U.S. companies are required to file an income statement, quarterly usingForm 10-Q and once annually using Form 10-K. Following this data over time, managers canuncover areas in need of improvement and more accurately forecast future financialperformance. For example, an unusually highincrease in the cost of raw materials over a period may only become evident when a P&Lis created. Profit and loss statements can also demonstrate to external parties, such asinvestors and lenders, that the company is profitable and where that profit comes from,which in turn is useful for determining whether the company is worthy of an investment orloan.

How Profit and Loss (P&L) Statements Work

A profit and loss statement showcases a company’s revenue and expenses; the moredetailed itis, the more useful it can be to anyone inside or outside the business who wants a handle onthe inner workings that begin with revenue and culminate in a net profit or loss. There areseveral types of P&Ls that range in the level of detail provided. For example, a simpleP&L typically provides a basic summary of financial data for a high-level overview ofprofits and losses, while a more detailed P&L may include granular data, such as abreakdown of sales and expenses by product line. (More on this later.) Also noteworthy:P&Ls typically show comparative financials from previous periods — typically yearoveryear — so analysts can compare changes in profits and losses over time.

As noted earlier, a profit and loss statement is one of three main financial statements thatare generated monthly, quarterly and annually. Together they form a full picture of acompany’s financial well-being. The other two statement are:

• The cash flow statement,which reveals a company’s ability to convertassets to cash, referred to as liquidity. More specifically, the cash flow statementlists the amount of cash and cash equivalents that flowed into and out of the businessover a specific period from operating, investing, and financing activities.
• The balance sheet, whichpresents a cumulative snapshot of abusiness’s financial position, including assets, liabilities and equity at a pointintime, usually the end of an accounting period.

Basic P&L Formula

The profit and loss statement is based on a simple formula that begins with total revenuefrom sales for a particular accounting period. Other income from noncore (ancillary)business activities, such as interest income, are added to revenue, as are gains fromnon-recurring transactions, such as the sale of equipment for more than its carrying value.Expenses related to business activities and losses related to noncore activities, such as alawsuit payout, are subtracted. The result is net income, which indicates whether thebusiness was profitable.

The basic formula to determine net income is:

Net income = revenue – expenses +gains– losses

For example, let’s say at the end of a fiscal year a business earned $675,000 inrevenue fromsales and generated $35,000 from the sale of a fully depreciated asset. The latter is again. During that same year, the business had $400,000 worth of expenses — mostrelated toCOGS — plus another $55,000 in ancillary losses. Using the P&L formula, net incomecanbe calculated like this:

Net income = revenue – expenses +gains– losses
($675,000 – $400,000 + $35,000 – $55,000)
Net income = = $255,000

What the Profit and Loss Statement Shows

A P&L is typically broken into several sections. The top section lists net sales followedby the cost of goods sold (an expense). The difference between them is called gross profit, and it represents how much money isleft after thebusiness has paid all of its direct expenses. Simpler P&Ls may list COGS on one line,whereas others may break it down into specific categories, such as raw materials and labor.

The next section lists all operating expenses, which arenot directly related to the productionof goods but are necessary for the business to operate. They include administrative fees,office supplies, advertising, and insurance. These expenses are subtracted from gross profitto arrive at operating income — alsoreferredto as earnings before interest andtaxes (EBIT) — which assesses abusiness’s operating profitability. Managers tend to have more control over theiroperatingexpenses than cost of goods sold, which is dependent on external factors beyond theircontrol, such as the price of raw materials.

Other miscellaneous financial gains and losses are listed next. Gains can include lawsuitsettlements in the business’s favor and the sale of assets above their net carryingvalue.Losses can include the same, only in the form of outbound payments, such as for a lawsuitsettlement paid out by the business and sales of assets below their carrying value. Theresult is income before taxes, also known as earnings before taxes (EBT), after which taxesare deducted to arrive at net income. Net income can be distributed to owners, used to paydown liabilities or retained and used to grow the business.

Components of a Profit and Loss Statement

Profit and loss statements can vary in detail and be organized however it makes the mostsense for a company, depending on the type of analysis that a business plans to perform, andwhich standards and information are required by who it’s being submitted to. Forexample, accounting in constructionbusinesses will likely have differentexpense categories than in law firms, and their P&Ls will reflect those differences.However, some common line items in a business’s profit and loss statement include:

• Revenue: The top line of the P&L is net sales from goods orservices. This amount also reflects returns, discounts and other changes made during thesales process. More detailed P&Ls may show gross revenue and the various deductionsto get to net revenue, or they may segment revenue by product or service type or othercriteria set by the business.
• COGS: The cost of goods and services sold includes all the direct costsrequired to produce products or deliver services. Acquisition of raw materials, storagecosts, parts used in manufacturing and labor are some items that are included in COGS.It may also include depreciation of manufacturing equipment, depending on the accountingmethod used to create the P&L. (More on this soon.)
• Gross profit: Gross profit, also known as gross income, is determinedby subtracting COGS from revenue to reveal profitability from a business’s coreoperations. Without gross profit, a business won’t have the funds needed to coveritsexpenses, such as operating expenses and taxes.
• Operating expenses: These are the costs to run a business thataren’tinvolved in the production of a good or service. Operating expenses, such as , includecorporate office utilities, rent, salaries, marketing and shipping.
• Earnings before interest and taxes (EBIT): EBIT, also called operatingincome, is calculated by subtracting all operating expenses from gross profit. EBIT is acrucial profitability measure used to show the income from a business’s coreoperations.
• Non-operating expenses: These are miscellaneous expenses and one-offlosses outside of the business’s core activities, including interest payments,sales ofold and depreciated assets or lawsuit settlements, all of which influence income andcash flow.
• Earnings before taxes (EBT): EBT is determined after all gains areadded to and losses are subtracted from EBIT. EBT is a useful measure for comparingsimilar businesses’ performance.
• Net income: Net income is the last line of the P&L —calculatedafter taxes are deducted. This “kitchen sink” calculation is often the firstplace thatinvestors and lenders look to assess a company’s fiscal health.
• Earnings per share (EPS): For public companies, EPS is calculated bydividing net income by the number of shares outstanding. Investors use this figure tohelp decide whether they want to invest in a company.

Types of Profit and Loss Statements

A profit and loss statement typically follows one of several common formats, which dependsupon the size of the company, complexity of business operations, and reporting requirements.It’s important to choose the right type of P&L that accurately reflects businessoperations, provides sufficient information on, and meets reporting requirements. Somecommon types of P&Ls are:

• Single-step: A single-step profit and loss statement reports allrevenue items in one group and all expenses in another group to arrive at net income ina single calculation.
• Multistep: A multistep profit and loss statement is more detailed andcontains separate sections for operating and non-operating activities. It also includesintermediate totals — gross and operating profits, for example — to providemoregranular insight at each step of operations.
• Condensed: A condensed profit and loss statement is a shorter versionof multistep statements that summarize expenses into categories. Additional details areoften included in supplemental reports instead of on the P&L itself.
• Common-size: A common-size statement converts every line on the profitand loss statement — regardless of the type of P&L used — into apercentage of totalrevenue for easier side-by-side comparisons with other businesses. This isn’trequiredby GAAP, but rather is used internally for managers’ analysis or externally tocomparedifferent companies.

However, one of the primary differences among profit and loss statements isn’tdetectablejust by looking at the statements. Rather, it’s recognized by analyzing themethodology usedto create them — the cash method versus the accrualmethod which can have a big impacton how and when profit is measured. GAAP-compliant financial statements will disclose theaccounting methodologies used in the footnotes to the P&L.

Cash Method

The cash method recognizes revenue and expenses when cash is received from customers or paidout by the business, regardless of when a sale was made or the bill was received. Thismethod is the simpler of the two and is primarily used by smaller, private businesses, butit’s not GAAP-compliant.

Accrual Method

Public companies are required to use the accrual method, per GAAP, in which they recordrevenue when earned, even if the customer buys on credit and does not have to pay their billuntil a later date. This concept, known as revenue recognition, tendsto provide a more accurate view of abusiness’s operations because it bypasses the impact of payment timing that can muddytheview of when a business is actually conducting its core function — selling its goodsorservices. Similarly, expenses are recognized in the same period as incurred and COGS arerecognized in the same period as the applicable revenue — this is known as thematchingprinciple. For example, advertising expenses incurred in the third quarter are recognizedthen, regardless of when they are actually paid.

Profit and Loss Statement Examples

Below are three sample profit and loss statements, all for the same accounting period forfictional company “Mike’s Music Shop Inc.” The first is an example of acondensed P&L,the second a single-step P&L and the third a multistep P&L.

Single-Step Profit and Loss Statement

Multistep Profit and Loss Statement

Condensed Profit and Loss Statement

Fill-in-the-blank templates of the three profit and loss examples above can be downloaded here(opens in newtab). Theyareprogrammed with formulas to perform automatic calculations each step of the way. Smallstartup companies may choose to manually create their financial statements — andit’s adecent exercise to gain a foundational understanding of all the components that factor intobusiness success. But as the business grows, preparing its financial statements becomes morecomplicated, greatly increasing the likelihood oferrors. Automated software becomes muchmore practical and even essential to gather the necessary data and generate organizedfinancial statements in a timely manner.

Automate Your Accounting Statements and Reduce Errors WithNetSuite

NetSuite Financial Management solutions automatecomplex financialprocesses that lead to the creation of a company’s core financial statements,including theProfit and loss statement. Real-time data about a company’s financial performance isaccurately captured, consolidated, and reported in a timely manner and in compliance withGAAP. NetSuite ERP provides visibility across thecompany’soperational andfinancial processes as well as other areas of the business. Profit and loss statements canbe generated quickly, whenever they are needed, giving managers the information they need toincrease profits, reduce losses and raise that bottom line.

A profit and loss statement is one of three primary financial statements that all companiesshould prepare and update on a regular basis, and public ones are required to submitquarterly and annually. The P&L focuses on a business’s total revenue and gains,lessexpenses and losses, to determine whether it was profitable for a specific accountingperiod. If it was, the business will have earnings left over to distribute to shareholders,pay down its debts and reinvest in the business to grow. This is also a positive sign offinancial health to third parties, including investors and lenders. Internally, a profit andloss statement provides managers and decision-makers with insight into a company’sprofitability, factoring for a variety of costs and expenses incurred along the way. Usingthis data over time, managers can spot areas for improvement — such as growing revenueor acost-cutting measure — and more accurately forecast future performance.

Profit and Loss Statement FAQs

What is in a profit and loss statement?

A profit and loss statement (P&L) statement includes a business’s revenue, cost ofgoodsand services sold, operating expenses, interest, taxes, net income and any other gains andlosses. Revenue is known as the top line, and net income is called the bottom line.

Can I do my own profit and loss statement?

You can, but whether you should depends on the financial complexities of your business. Eventhe smallest of businesses that first create their P&Ls manually soon hand the job overto software, noting greater accuracy, timeliness, and speed.

What is profit and loss with an example?

Profit and loss statements come in several forms — condensed, single-step and multistep— allleading to net income. A condensed profit and loss statement presents summaries of revenueand expense categories. A single-step P&L only requires a single calculation todetermine net income. A multistep P&L goes into greater detail about income and expensesthan the others. A version of any of these formats that adds a column to convert each lineinto a percentage of revenue is referred to as a common-size P&L.

What is the difference between a profit and loss statement and a balancesheet?

A profit and loss statement and a balance sheet are two core financial statements thatbusinesses generate monthly, quarterly, and annually. A balance sheet lists acompany’sassets, liabilities, and equity at a point in time. A profit and loss statement listsrevenue, profits, expenses and other gains and losses over the course of a fiscal period.

Do all companies have to prepare a profit and loss statement?

Only public U.S. companies are required to prepare and submit a profit and loss statementwith the U.S. Securities and Exchange Commission and in adherence to the Generally AcceptedAccounting Principles. Still, private businesses can benefit from regular preparation andanalysis of their own profit and loss reports.

Why is a profit and loss statement important?

A profit and loss statement provides managers and decision-makers with insight into acompany’s profitability, factoring for a variety of costs and expenses incurred alongtheway. Using this data over time, managers can spot areas for improvement — such asgrowingrevenue or a cost-cutting measure — and more accurately forecast future performance.External parties, such as investors and lenders, also turn to a company’s profit andlossstatement to determine whether it’s worthy of an investment or loan.