What is a profit and loss (P&L) statement?

A profit and loss (P&L) statement is a type of financial report that summarizes your company's revenues, expenses, and net income or loss over a given period of time. Also known as an “income report,” a profit and loss statement gives you useful information about the financial health of your business and allows you to get an idea of ​​your company's ability to generate profits by increasing or decreasing revenue. of costs.

You can use a simple spreadsheet or accounting software like QuickBooks Online to generate profit and loss statements, either on a cash or accrual basis. Profit and loss statements are one of the main financial statements your business will rely on.

Let's take a deeper look at what a profit and loss statement is and how it can help your business succeed.

How Profit and Loss Statements (P&L) Work

Profit and loss statements follow a simple formula: They add up the various income figures over a chosen time period, minus any losses you incurred. The bottom line summarizes your net profit or net loss.

While the basic formula is very simple, profit and loss statements can be complicated to put together. There are many different ways to organize your profits and losses depending on who needs the information, and there are different ways to categorize income or losses. It can make an extremely detailed profit and loss statement or it can represent broader categories of income and expense sources.

These reports can also be done for any time period, although it is most common to generate profit and loss statements once a quarter.

How do you create a profit and loss statement?

There are many different tools you can use to create a profit and loss statement; the most common are spreadsheets or software, including accounting software and ERP software.

Software tools that can help you create profit and loss statements:

For beginners, the best accounting software offers reporting templates or tools that make it easy to create income reports and profit and loss statements based on the data collected. Many software platforms offer accounting applications that help keep expense data organized.

Why are profit and loss (P&L) statements important?

Profit and loss statements are useful for many business purposes, but some of the most important uses of a profit and loss statement are to show profitability and make data-driven decisions while planning for the future.

Show how profitable your business is over time

Even if your business just had a In fact big month, a profit and loss statement is necessary to show how your business has performed over a longer period of time than just the last month or quarter. Business owners and other stakeholders need this information to get a high-level view of how the company is doing and what variables impact the bottom line.

Showing profitability over time is also useful if you need financing. Profit and loss statements are one of the first things investors and banks will ask for to get an idea of ​​whether your business could be a worthwhile investment or not.

Help business owners plan for the future

You can't forecast income and losses in the future if you don't know how your business performed in the past. Profit and loss statements can help you project future performance and use data to plan for the future.

How many people should you hire next year? How much should you invest in inventory? What impact did that loss have in the third quarter? Profit and loss statements are necessary to answer all of these questions and more.

Components of a Profit and Loss Statement (P&L)

There are 10 main components in a standard profit and loss statement:

1. Revenue.
2. Gross profit.
3. Cost of goods sold (COGS).
4. Operating expenses.
5. Depreciation and amortization.
6. Interest expenses.
7. Taxes.
8. Operating income.
9. Earnings before interest, taxes, depreciation and amortization (EBITDA).
10. Net income.

Things like revenue, operating income, and gross profit have to do with how much money your business makes during the specified time period. Factors such as COGS, depreciation/amortization, operating expenses, and taxes represent losses your business has incurred.

Ultimately, net income is the bottom line of your profit and loss statement. It shows how much money your business made after paying off all other costs. EBITDA can also be a useful metric, depending on the financial factors you want to highlight. EBITDA is the amount of money your company earns before interest, taxes, depreciation, and amortization.

Please note that to obtain accurate and useful profit and loss statements, you will need to have generally accepted accounting principles (GAAP) in place. These include using best practices for things like single- or double-entry accounting and maintaining a complete chart of accounts.

Types of Profit and Loss Statements (P&L)

Profit and loss statements are highly customizable and you can evaluate various time periods or financial factors to generate the most useful results. Some common types of profit and loss statements include:

• Standard.
• Budgeted.
• Comparative.
• Several steps.
• Consolidated.
• Contribution.

The type of profit and loss statement you choose depends on what you want to use it for. If you want information to help you forecast how much revenue you can expect at any given time, then you need a budgeted P&L. If you want to compare figures from different time periods to see how your business is performing at a certain time of year, you will need a comparative profit and loss statement.

Accounting software that offers customizable reports typically makes it easy to generate multiple types of profit and loss statements based on individual business needs. Larger companies may need business accounting software to delve into complex variables and manage larger data sets.

Profit and Loss Statement (P&L) Example

If you're new to accounting or bookkeeping, then all the possible variables and details can make profit and loss statements seem intimidating. But they can also be simple. Let's look at a simple profit and loss statement example for a hypothetical retail store:

After accounting for everything else, net income shows how much this retailer has earned throughout the year.

Even using only high-level details, a profit and loss statement can still give you useful information about a company.