A profit and loss statement is a document that businesses generate to track their revenue and expenses over a period of time. This time period is most often either quarterly or a fiscal year. The document will be a breakdown of the business’s revenue and a breakdown of expenses, subtracting the expenses from the revenue to get the profits.
A profit and loss statement is considered one of a trio of important financial documents, which include a balance sheet and cash flow statement. The profit and loss statement currently holds its place as the most popular and common of the three documents.
Key Takeaways:
-
A profit and loss statement tracks a company’s revenue and expenses, as well as the profit it made over a period of time.
-
These records typically track revenue and expenses either quarterly or over the course of the fiscal year.
-
The two most common ways to organize the document are the cash method, which tracks cash flow, and the accrual method, which is based on sales and expenses.
-
These documents are required to be filed with the FEC if your company is publicly traded and is part of the GAAP standards.
What Is a Profit and Loss Statement?
A profit and loss statement, sometimes shortened to a P&L statement, has a self-explanatory name. It’s a record that records a business’s profits and losses over a period of time, usually either quarterly or every fiscal year.
A P&L statement is a summary. It includes the company’s revenues, or money it brings in, minus costs and expenses over the course of the same time period. This provides a look at a business’s financial health over a set period of time. They are one of the documents that are often presented to management or to investors to show how profitable the company is.
A profit and loss statement or P&L statement is by far the most common name for this particular document. However, these records have several other names, including:
-
Statement of profit and loss
-
Income statement
-
Expense statement
-
Statement of operations
-
Earnings statement
-
Statement of financial results
-
Statement of income
How to Create a Profit and Loss Statement
Creating a profit and loss statement is a matter of accounting. First, you must decide at what interval you want to create such records – is it quarterly, annually, or under some other time frame? Then, you gather together your financial information.
In order to write up a P&L statement, you’ll need to mark down:
-
Revenue. P&L statements traditionally start with revenue, which is why revenue is sometimes referred to as the top line. If your business makes sales regularly as part of its operations, then sales may also be listed here.
Revenue is a gross income measure. That means that it’s the amount of money your business receives for products or services, as well as other sources of income. Such sources of income can include sales of old equipment, legal rewards, or a tax return. Therefore, it’s the amount of money you receive without adjusting for money spent.
-
Expenses. This covers recurring expenses in order to run the businesses. Many of these would fall under the expenses of general operations, but it can also include:
-
Goods purchased for sale
-
Rent
-
Wages
-
Repairs or maintenance
-
Rent
-
Utilities
-
Payable interest
-
Insurance
-
Losses of sales on assets
-
-
Costs. Unlike expenses, costs tend to be one-time purchases. This can include assets like purchasing property, a hiring bonus, or equipment. There are also:
-
Fixed costs. This is a cost that doesn’t change over time and instead stays the same amount for a long period of time.
-
Variable costs. These costs can vary, such as the price of materials fluctuating with the market.
-
-
Profits. Your business’s profits are your revenue minus your costs and expenses. This number is put at the bottom of the document, which is why it’s also called the bottom line.
(It should be noted that expenses and costs do overlap depending on how they’re recorded and the method of accounting. They’re more often used in the way defined in this article, but it isn’t as strict as other types of business jargon.)
Once you have your revenue and expenses lined up, it’s time to decide how you’re going to organize your P&L statement. There are two commonly used methods to calculating your profits and losses:
-
Cash method. The cash method is tied to cash flow. This is more commonly used by small businesses, as well as personal budgeting. In this organizational scheme, it’s all based on cash flow. You put it in the ledger when the money goes out to the door and when you receive payment.
While this keeps track of how much money you have on hand, it can be less precise. You may make a sale in the previous quarter but only receive payment in the one following. In this case, you’d mark it down in the quarter where you received the payment, not when you made the sale.
-
Accrual method. This method is the opposite of the previous one. It instead marks down expected expenses and payments in the quarter where the service or sale took place rather than when the money is paid or received.
In this scenario, if you made a sale in the previous quarter and got paid in this one, the revenue received would still be marked in the previous quarter. It’s the same with expenses.
Even if your business isn’t billed until the next quarter, you put down the loss in the quarter where you got the needed service – such as maintenance on a company vehicle.
This organization is much more commonly used by larger businesses where cash flow isn’t as important to track directly, as they have a lot more cash on hand at any one time.
Profit and Loss Statement Example
There are several different ways to lay out a profit and loss treatment, but the majority of businesses use either a spreadsheet or chart of some sort. The number of columns and exactly what information is contained in the report will vary depending on how the accounting department chooses to lay it out. But here’s an example:
Profit and Loss Statement
Company Name
For the Year Ended 2023
Revenue Description Amount Sales Widgets $1,000.00 Services Repairs $1,000.00 Other income Misc $500.00 Gross income $2,500.00
Expenses Description Amount Cost of goods Buying widgets $750.00 Salaries Repair technicians $1,000.00 Rent Office building $500.00 All other expenses Misc $100.00 Total expenses $2,300.00
Total profits: $200.00
Profit and Loss Statement FAQ
-
What’s the difference between a profit and loss statement and a balance sheet?
The main difference between a profit and loss statement and a balance sheet is the timeframe. A profit and loss statement covers revenue and expenses over a set period of time. A balance sheet, on the other hand, is a snapshot of what the company owes and how much cash it has on hand on a particular day.
A balance sheet is usually made up on the final day of a fiscal year. Investors and management use both records as a way to assess the company’s financial health, but they measure different things.
-
Are all companies required to prepare profit and loss statements?
No, not all companies are required to prepare profit and loss statements. If your business is small and private, then it may not be necessary to formally prepare these statements, as compliance with the generally accepted accounting principles (GAAP) may not be enforced.
However, if you have a publicly traded company, then the U.S. Securities and Exchange Commission (SEC) requires financial documents to be filed with them. This allows investors, analysts, and regulators to access this information and make sure that companies are complying with regulations and laws.
-
Why are profit and loss statements important?
A profit and loss statement allows investors and analysts to use these data to determine the profitability of the company. Looking at how much money was spent on expenses and how much revenue came in – and from where – allows analysts to look for ways to improve profits.
In addition, the documents are required to be filed with the FEC if the company is publicly traded so that investors are able to make informed decisions as to where to invest their money. It also allows regulators to keep tabs on companies and make sure they’re following laws and regulations.
-
How often should you generate a profit and loss statement?
Profit and loss statements can be generated at any frequency: daily, weekly, biweekly, monthly, every six months, or annually. The most common is going to be quarterly or annually, but many will recommend monthly in order to keep more on top of expenses.
However, a lot of this is going to come down to personal preference. One way or the other, you’re going to want to generate records of revenue and expenses, so putting them into a profits and loss statement may not be much extra effort.
References:
-
Chamber of Commerce – Guide to Profit & Loss Statements for Small Businesses
-
Corporate Finance Institute – Profit and Loss Statement (P&L)
Author
Di Doherty
Di has been a writer for more than half her life. Most of her writing so far has been fiction, and she’s gotten short stories published in online magazines Kzine and Silver Blade, as well as a flash fiction piece in the Bookends review. Di graduated from Mary Baldwin College (now University) with a degree in Psychology and Sociology.
