A profit and loss statement, otherwise known as a P&L or income statement, is a document that measures and reports a company’s expenses and revenue during a specific period of time. This shows a company’s financial status and progress during the time surveyed.
The statement details a company’s capability to create profit by driving revenue, cutting costs, or a mix of the two. The statement details categories of revenue and expenses, which include net sales, cost of goods sold, selling and administrative expenses, gross margin, and net profit.
P&L Statement vs. Balance Sheet vs. Cash Flow Statement
These three reports often get mixed up, so we’ve laid out the differences between them to help you understand the use of each.
Profit and Loss Statement
Determines how profitable a company is over a period of time. If a business’s revenues are greater than its expenses, the statement shows a net profit. Otherwise, a net loss is shown. In essence, it determines whether or not a company has profited over a certain period. Learn how to prepare a profit and loss statement here.
Provides a general overview of the company’s financial situation at a specific point in time, like a snapshot. This report includes the company’s assets and liabilities as well as its owners’/stockholders’ equity. The balance comes from the sum of all the assets being equal to the sum of the liabilities plus the shareholders’ equity. This report helps the business’ owners and managers to keep control of the present financial situation so that they will be capable of making proper financial decisions. Learn how to prepare a balance sheet here.
Cash Flow Statement
Records the amount of actual money that flows in and out of a business. It details how a company’s operations are running, where the money originates, and how it is spent. This report gives investors insight into how well (or how poorly) cash flow is managed. Learn how to run a statement of cash flows here.
Why You Need to Prepare a P&L Statement
There are plenty of reasons why you should be preparing P&L statements (as well as other financial statements!). Here are a few.
1. Make Wiser Decisions
If you have your P&L statement on hand, you are able to look back on it to review how well your company fared over a chosen period of time. With the results in mind, you will then be able to make better financial decisions, as you’re armed with concrete knowledge of how your business is doing in terms of revenue and expenses. Provided that the numbers aren’t in the red, you will be able to invest money back into your business, and make decisions that would have otherwise required dangerous guesswork.
2. Have Proof of Your Business’ Success
Having your P&L statements on paper means that you’re able to show a chronological record of how well your business has been doing over the course of its operation, allowing you to play your cards right around investors, or with buyers if you have the intention of selling the business. It also serves as a measure of trust, as it may be requested by any new clients who wish to do business with you.
3. Prepares You to File Taxes
If you regularly update your P&L statements (as well as your other financial statements), you’ll have all the information you need for sorting out your business taxes when the day inevitably arrives. Updated financial statements also mean that your accounting software is also being regularly updated.
5 Steps to Preparing a Profit and Loss Statement
There are a few steps you have to take in preparing a simple P&L statement, which we will summarize below.
Step 1: Keep clean records
Your records have to be virtually spotless if you don’t want to have a difficult time determining your P&L statement. You have to have a clear-cut record of how much money is coming into and going out of your operations. If you find that this is a difficult job, try hiring a bookkeeper, or use an accounting software to help you get all the relevant information together.
Step 2: Select the time period
Before you begin preparing your P&L statement, you first have to ascertain which period of time you will be looking at. Regardless of how recent or long ago this time period is, you really have to cement the “when” of your P&L statement if you want the rest of the steps to make sense.
Step 3: Find your revenue
Revenue comes from the total amount of money that your business has taken in from its various endeavors. In general, your revenue will come from the sale of products and/or services.
Step 4: Find your expenses
Every little thing you’ve spent money on for your business during the period of time you’ve selected needs to be taken into account. These are your expenses. You might have to consider other factors as well, like returns or refunds.
Step 5: Find your profit number
Profit is derived from revenue minus expenses, so calculate that to determine your result. If you’d like, you can also determine your net income, which is your income after taxes. If you don’t like math, use a software to help you generate your P&L statement. This saves time and ensures that your bookkeeping is accurate.
Frequently Asked Questions
What is the difference between a P&L statement and a statement of revenue?
There is no difference between a profit and loss statement and a statement of revenue. Profit and loss statement, P&L income statement, and statement of revenue are all terms used to describe the same financial report.
Why is preparing a profit and loss statement important?
Preparing a profit and loss statement and reviewing it regularly will give you insight into area of the business where you are making money (or losing money). It will also provide you with where you are spending your money which can help you determine where you may be able to cut costs.
What is P&L management?
P&L management is managing the money that goes in and out of a company in order to ensure that a business is achieving a net operating profit.
How do you calculate your net income?
Calculating a business’ net income involves three steps:
- Start with the company’s total revenue.
- Subtract the expenses the business has incurred as well as operating costs. This is the business’ earnings.
- Deduct tax from the earnings, and you will arrive at the business’ net income.