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What Is A Profit and Loss (P&L) Statement - Investopedia
What Is A Profit and Loss (P&L) Statement - Investopedia
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Key Takeaways
The profit and loss statement is a financial statement that summarizes the revenues, costs, and expenses
incurred during a specified period.
The P&L statement is one of three financial statements every public company issues quarterly and annually,
along with the balance sheet and the cash flow statement.
When used together, the P&L statement, balance sheet, and cash flow statement provide an in-depth look at a
company's financial performance together.
Statements are prepared using the cash or accrual method of accounting.
It is important to compare P&L statements from different accounting periods, as any changes over time become
more meaningful than the numbers themselves.
The P&L or income statement, like the cash flow statement, shows changes in accounts over a set period of
time. The balance sheet, on the other hand, is a snapshot, showing what the company owns and owes at a single
moment. It is important to compare the income statement with the cash flow statement since, under the accrual
method of accounting, a company can log revenues and expenses before cash changes hands.2
This document follows a general form as seen in the example below. It begins with an entry for revenue, known
as the top line, and subtracts the costs of doing business, including the cost of goods sold, operating expenses,
tax expenses, and interest expenses. The difference, known as the bottom line, is net income, also referred to as
profit or earnings.
P&L management refers to how a company handles its P&L statement through revenue and cost management.
Investopedia/Grace Kim
Special Considerations
It is important to compare income statements from different accounting periods. The reason behind this is
because any changes in revenues, operating costs, research and development (R&D) spending, and net earnings
over time are more meaningful than the numbers themselves. For example, a company's revenues may grow on
a steady basis but its expenses might grow at much a faster rate.
Revenues and expenses for non-profit organizations are generally tracked in a financial report called the
statement of activities. As such, this report is sometimes called a statement of financial activities or a statement
of support.
Cash Method
The cash method, which is also called the cash accounting method, is only used when cash goes in and out of
the business. This is a very simple method that only accounts for cash received or paid. A business records
transactions as revenue whenever cash is received and as liabilities whenever cash is used to pay any bills or
liabilities. This method is commonly used by smaller companies as well as people who want to manage their
personal finances.3
Accrual Method
The accrual accounting method records revenue as it is earned. This means that a company using the accrual
method accounts for money that it expects to receive in the future. For instance, a company that delivers a
product or service to its customer records the revenue on its P&L statement, even though it hasn't yet received
payment. Similarly, liabilities are accounted for even when the company hasn't for any expenses yet.4
You can find many templates to create a personal or business P&L statement online for free.
You can use the income statement to calculate several metrics, including the gross profit margin, the operating
profit margin, the net profit margin, and the operating ratio. Together with the balance sheet and cash flow
statement, the income statement provides an in-depth look at a company's financial performance.
Operating costs:
Private companies, on the other hand, are not necessarily required to comply with GAAP. Some smaller
companies, though, may even not prepare formal financial statements at all.
Article Sources
Related Terms
Financial statement analysis is the process of analyzing a company's financial statements for decision-making purposes.
more
The indirect method uses changes in balance sheet accounts to modify the operating section of the cash flow statement
from the accrual method to the cash method.
more
Accrual accounting is an accounting method where revenue or expenses are recorded when a transaction occurs versus
when payment is received or made.
more
The modified cash basis combines elements of the two major accounting methods: cash and accrual accounting.
more
more
Cash flow is the net amount of cash and cash equivalents being transferred into and out of a business.
more
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