What is Profit and Loss (P&L) Statement?

A Profit and Loss (P&L) Statement, also referred to as an income statement, earnings statement, expense statement, or operations statement is a type of financial statement where companies report their revenue, expenses, gains, and losses incurred throughout a specific period of time. 

This type of financial statement allows the company to assess its performance in regard to the amount of money it’s making or losing. It does this by evaluating these aspects:

• Revenue - the total amount of money generated from selling goods or services;
• Costs - the amount of money spent to sell goods or services;
• Net profit - the remnants of subtracting costs from revenue.

This is considered to be crucial information when making business decisions and investments. 

Public companies must report Form 10-Q to the U.S. Securities and Exchange Commission (SEC) on a quarterly basis. Private companies are the exception to this rule.

While the statement is a legal requirement, companies may also fill it for their own personal interests. Entire corporations and smaller divisions within said corporations can fill out a profit and loss statement.

The P&L statement is used for a variety of other purposes such as:

• Ensuring investors, regulators, and tax collectors are up to date with the company’s performance;
• Making informed business decisions;
• Preparing future budgets;
• Analyzing and measuring the company’s profitability;
• Cutting expenses.

What is in a Profit and Loss Statement?

This is the structure of a P&L statement:

• Sales revenue is the total amount of money a company receives from selling goods or services. It takes into account every discount and sale as well as a deduction from goods that were returned; 
• Costs of goods and services sold refer to the amount of money that is directly spent on the process of selling goods and services such as elements of production like labor and materials;
• Operating income, also known as earnings before taxes, describes the amount of money left after subtracting direct and indirect costs from the sales revenue. 
• Operating expenses refer to the expenses that a company incurs when operating as usual. It takes into account various indirect costs including rent, general office supplies, salaries of administrative personnel, repairs, and utilities to name a few. Equipment depreciation is sometimes added to the operating expenses. 
• Gross profit represents the remaining amount of money after deducting the cost of goods and services sold from the sales revenue.  

How to Calculate a Profit and Loss Statement?

You can calculate the P&L statement by taking away the costs of goods or services sold out of the total revenue. Next, calculate the net income by also taking away operating expenses from the total revenue. 

What is the difference between a Profit and Loss Statement and a Cash Flow Statement?

P&L statement tracks revenue minus expenses incurred within a specific period of time. On the other hand, a cash flow statement records the amount of money that goes in and out of a company within a specific period of time.