What Is a Profit and Loss (P&L) Statement?
A company's statement of income is often called its profit and loss statement (P&L). It lists revenues, expenses, and net profit for the period covered. There are typically quarterly and annual P&Ls, but some companies might publish monthly P&Ls.
Public companies produce P&L statements to meet legal reporting requirements and inform investors. The P&L is carefully reviewed by market analysts, investors, and creditors to evaluate a company's revenues, expenses, and profitability.
Key Takeaways
- A P&L statement shows a company's revenues and expenses related to running the business, such as rent, cost of goods sold, freight, and payroll.
- Each entry on a P&L statement provides insight into how much money a company made and spent.
- P&L statements help companies gauge how well they're operating and benchmark current performance relative to future projections.
- They provide financial information that can be compared to that of rivals in the same industry.
- Investors and lenders use P&L statements to inform their investing or lending decisions.
What Does a P&L Statement Show?
The P&L contains details about a company's financial circ*mstances. The statement generally has the following sections but can have less or more as long as it presents all relevant information:
- Revenues: The total amount of income from the sale of goods or services associated with the company's primary operations.
- Expenses: Costs deducted from revenue, such as cost of sales or goods sold, wages, rent, interest payments, marketing, administration costs, utilities, interest expenses, depreciation
- Gains: Any gains during the period, such as selling unused equipment
- Losses: Any losses incurred in the period
- Net income: While not necessarily a section on its own, this line item shows what was earned after accounting for everything. It is also known as "the bottom line."
Due to its comprehensiveness, the P&L statement paints a clear picture of how much money a company made and spent and whether it was profitable or suffered a loss.
To ensure a proper understanding of profitability, accountants use accrual accounting to prepare the P&L statement. Accrual accounting recognizes revenue and expenses when they occur rather thanwhen money is received or paid.
Example of a P&L Statement
P&Ls may not be labeled as such. For example, Pressure Bioscience's P&L is its statement of operations. This particular statement is broken into three sections:
- Revenue
- Costs and Expenses
- Other (Expense) Income
It then lists net losses and shareholder information at the bottom.
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Why Are P&L Statements Made Public?
P&L statements are made available to the public for a variety of reasons. First, public companies in the U.S. are required to file their financial statements with the SEC. The inner financial workings of a company are of great interest to numerous people, including accountants,economists, and investors.
Even business owners need a comprehensive understanding of a company's financial events and results. The P&L and other financial statements can help them identify unnecessary expenditures, opportunities to increase revenue, and other ways to improve performance.
For all of these professionals, assessing a company's financial strength means taking a detailed look attotal revenue, expenditures, the amount of debt or leverage, additional investments,secondary operations, and tax burdens.
Financial statements, including the P&L, can help businesses understand current performance relative to projections and create realistic forecasts. They can also help business owners and investors compare a business's performance against competitors.
How Investors Use P&L Statements
Investors and lenders use data from P&L statements to determine a company's profitability andrisk level. For example, companies must provide evidence of their financial standing and ability to make consistent payments to apply for loans.
If the P&L statement reflects that a company does not generate enoughrevenueto adequately cover current loan payments, banks are less likely to loan additional funds. Sometimes, a downturn in income could signal loan default.
What Is the Difference Between the P&L Statement and a Cash Flow Statement?
An income (or P&L) statement shows readers the revenue and total expenses for a certain period. The cash flow statement details a company's cash inflows and outflows during that period. The cash flow statement starts with the figure for net profit, which it gets from the P&L.
Does Every Company Have to Prepare a P&L?
No. Only public companies are legally required to prepare the P&L and other financial statements and file them with the SEC annually and quarterly. Companies not required to prepare financial statements such as the P&L should consider doing so because they provide business owners with a systematic way to obtain a clear view of their company's financial circ*mstances.
Why Does the P&L Statement Matter?
It matters because it shows investors, analysts, and business owners whether a company is making or losing money. A careful review of the P&L also can stimulate ideas for cutting expenses and increasing revenue.
The Bottom Line
A P&L statement shows investors and other interested parties the amount of a company's profit or loss. Revenue and expenses are shown when they occur, not when the money actually moves into or out of the company's bank account. The P&L statement is often the most sought-after financial document because it shows whether a company is making money.
