Profit and Loss (P&L) Statement

November 21, 2023 - Around 3 mins mins to read

Understanding the Profit and Loss (P&L) Statement

A Profit and Loss (P&L) statement, also referred to as an income statement, operating statement, earnings statement, or statement of operations, is a financial report that provides a comprehensive overview of a company’s revenue and expenses, including gains and losses. This statement is essential in determining the profitability of a business and plays a significant role in making investment and business decisions.

The P&L statement presents crucial financial information, including the amount of profit or loss generated by the company. It reveals the revenue generated by the company, the costs incurred to generate that revenue, and the resulting net profit after subtracting costs from revenue.

Companies may prepare a P&L statement for a specific division or for the entire corporation. It can be used as an internal document or included in regulatory filings, such as those required by the U.S. Securities and Exchange Commission (SEC) for public companies.

The P&L statement serves several purposes, including:

Reporting income to investors, regulators, and tax collection agencies
Assessing profitability
Identifying areas where expenses can be reduced
Guiding future business decisions
Developing budgets

Distinguishing the Profit and Loss Statement from the Cash Flow Statement

It is important to note that a profit and loss (P&L) statement differs from a cash flow statement. While the P&L statement tracks revenue minus expenses over a specific period, typically monthly or quarterly, the cash flow statement focuses on the movement of money into and out of the business during the same period.

Components of a Profit & Loss Statement

A profit and loss statement includes the following components:

Sales Revenue: This represents the money received by the company for goods or services, including any discounts or deductions for returned merchandise.

Cost of Goods Sold (COGS): This includes the direct costs associated with the production of the goods sold. It encompasses the cost of materials and labor involved in the production process, excluding indirect expenses like distribution and sales force costs.

Gross Profit: This is the remaining amount from sales revenue after subtracting the cost of goods sold. Gross profit is reported on the income statement before deducting operating expenses.

Operating Expenses: These expenses are related to the company’s main operations and include items such as rent, utilities, and office supplies. Additionally, operating expenses may include depreciation expenses for equipment used in daily operations.

Operating Income: This represents the excess of revenues over expenses from primary activities. It is calculated before deducting taxes, interest charges, and any extraordinary items. Operating income reflects earnings before tax and interest.

The P&L statement is calculated by subtracting the cost of goods sold (COGS) from total revenue. COGS includes all direct costs associated with producing and selling products or services, such as labor, materials, and shipping. In other words, it encompasses all expenses involved in creating the product or service, excluding any discounts from suppliers.

To calculate net income, operating expenses must also be subtracted from total revenue. Operating expenses include all indirect costs, such as administrative salaries, office supplies, and rent or utilities for the business location.

Glossary