DEFINITION
An organization’s income and costs over time are summarized in a profit and loss (P&L) statement.
Main Points
The income and expenses that contribute to a company’s profits (or losses) are detailed in a P&L statement.
Revenue on the top line is discussed before the bottom line.
Reviewing adjustments in P&L statements across several periods is recommended.
A P&L statement’s data can be supplemented by other financial statements.
A profit and loss statement’s definition and illustrations
A P&L statement, commonly called a “income statement,” is a financial statement that lists earnings and outlays for a particular time period. This report classifies revenues and expenses to help you understand what drives a company’s profitability. You may, for instance, determine whether a company spends more on production than it makes and see operating earnings independently from financing costs and taxes.
How to Read a Profit and Loss Statement
The tale behind profitability (or losses) emerges as you go through income and costs step by step. Starting with revenue, the income statement then continues on to expenses, which ultimately lead to the organization’s profit or loss.
Cost of goods sold (COGS) is the term used to describe the expenses associated with any necessary parts or materials. Gross profit is the end result. The statement then deducts any costs associated with operating the firm, including payroll, utilities, maintenance fees, and other charges. Operating profit is the end result. At this point, you can tell how well the business is at turning a profit on its products or services.
Knowing the bottom line after all taxes and interest expenses is equally important to being able to operate at a profit. If a company borrows money, high interest rates could wipe out any gains. You can determine whether businesses are using debt wisely by looking at interest costs. Additionally, since taxes are a fact of life for many firms, you must determine how much profit is left over after paying all necessary expenses.
You arrive at the net income after deducting all expenditures, including input costs, operational expenses, financing charges, and taxes.
Examining Income Statements and Balance Sheets Over Time
The financial outcomes for one period are summarized in a P&L statement. But unless you have a sense of the overall situation, that information might not be helpful. You might be able to identify trends by looking at how the P&L statement evolves over time. For instance, if COGS grows significantly, that can signal lower profitability in the future (or only a brief increase in input prices). Therefore, it’s critical to think of each P&L statement as a separate puzzle piece.
Financial Statements in Other Forms
A P&L statement contains useful data on revenue and outgoing costs. However, it is advisable to examine additional financial statements in order to get a full picture of an organization’s financial situation.
Account Statement
A balance sheet displays the assets, liabilities, and equity of a business. The items the business can sell or employ to generate income are referred to as assets and are listed on the left side of the balance sheet. On the right, liabilities are bills or commitments that might cut into profits. Finally, equity is the value of the business after all liabilities have been paid and all assets have been used.
Payables Statement
Changes in cash levels are described in cash flow statements. The capacity to manage cash is essential because firms need liquidity to stay afloat. It is simple to mistake an income statement for a cash flow statement. However, the P&L statement outlines the financial idea of profits, which may not have the same effects on cash flow as you might anticipate. Depreciation, for instance, may appear as a “expense” on the P&L statement but is actually an accounting concept rather than a cash flow. Actual payments and receipts are the main emphasis of the cash flow statement.
