A company's statement of income is often called its . 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 Profit and Loss (P&L) Statement Show?
The P&L contains details about a company's financial circ*mstances. The statement generally has the following sections:
- 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 the cost of goods sold (COGS), wages, rent, marketing, administration costs, utilities, interest expenses, and 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 how comprehensive it can be, the P&L statement paints a clear picture of how much money a company makes and spends. It also highlights whether the company 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.
Why Profit and Loss (P&L) Statements Are 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 Securities and Exchange Commission (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 Profit and Loss (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 enoughoperating income to adequately cover current loan payments, banks are less likely to loan additional funds. Sometimes, a downturn in income could signal loandefault.
If you're an investor making important investment decisions, be sure to compare the P&L statements of companies that are similar in size and within the same industry or sector. This gives you an apples-to-apples comparison. Comparing the financial statements of a large pharmaceutical company with those of a small energy company doesn't make sense, as they have different factors that play into their revenues and expenses.
Profit and loss statements may commonly be referred to as any of the following:
- Statement of profit and loss
- Statement of operations
- Statement of financial resultsor income
- Earnings statement
- Expense statement
- Income statement
Example of a Profit and Loss (P&L) Statement
Some companies publish their P&L statements under that name. Others may use different terms to describe the same thing. Consider Pressure Bioscience, which calls its P&L a statement of operations.
The image below shows how the P&L statement or, in this case, the statement of operations is broken down:
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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. The total value under the expense category is subtracted from the total value of the company's revenue, resulting in an operating profit if the result is positive or an operating loss if it's negative.
What Is the Difference Between the P&L Statement and a Cash Flow Statement?
A P&L or income statement shows readers the revenue and total expenses for a certain period. The cash flow statement, on the other hand, details a company's cash inflows and outflows during that period. This statement starts with the figure for net profit, which it gets from the P&L statement.
Does Every Company Have to Prepare a P&L Statement?
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 profitable.
