Profit and Loss (P&L) Statement

What Is a Profit and Loss (P&L) Statement?

A Profit and Loss (P&L) statement is a financial report, also known as an income statement, operating statement, earnings statement, or statement of operations.

The P&L statement shows the company’s revenue and expenses, including gains and losses. It lets you see how much profit the company is making or losing, which can help you make investment and business decisions.

The P&L statement will show you how much money your company is bringing in (revenue), how much it spends to get that money (costs), and what’s left once you subtract costs from revenue (net profit).

Companies use the P&L statement to:

• Report income to investors, regulators, and tax collection agencies;

• Assess profitability;

• Identify areas where expenses can be reduced;

• Guide future business decisions; and

• Develop budgets.

Profit and Loss vs. Cash Flow Statement

A profit and loss (P&L) statement is different from a cash flow statement. While the P&L statement tracks revenue minus expenses over a period of time — typically each month or quarter — the cash flow statement tracks the movement of money into and out of your business during the same period.

Components of Profit & Loss Statement

A profit and loss statement lists the following:

Sales Revenue: Money received by the company for goods or services, including discounts and deductions for returned merchandise.

Cost of Goods Sold: It is the direct costs associated with the production of the goods sold. COGS also involve the cost of materials & labor spent on goods production. It doesn’t include indirect expenses such as costs of distributions & sales force. 

Gross Profit: This is what remains from sales revenue after subtracting the cost of goods sold. Gross profit will appear on an income statement before operating expenses are subtracted out.

Operating Expenses: Expenses relating to the company’s main operations. Operating expenses include items such as rent, utilities, office supplies, etc. In addition, operating expenses may also include depreciation expense on equipment used in daily operations.

Operating Income: The excess of revenues over expenses from primary activities; it is calculated before taxes and interest charges are deducted and extraordinary items are included (if any). Operating income represents earnings before tax and interests. 

The P&L statement is calculated by subtracting the cost of goods sold (COGS) from total revenue. The COGS figure includes all direct costs associated with producing and selling products or services, such as labor, materials, and shipping. In other words, it includes everything that goes into making the product or service you sell to customers, minus any discounts from suppliers.

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