Whether you call it a profit and loss statement, an income statement, or one of the several other aliases this financial statement goes by, understanding this document will give you greater insight into your company’s overall financial health. Learn how P&L statements work and why they matter.
What is a profit and loss statement?
A profit and loss (P&L) statement details the revenue, expenses, and costs from a specific time period in order to show net profits. Also called an income statement, this financial report can spell out whether a business is making a profit or losing money. It can help you understand what helps drive profitability in your business and also reveal potential financial issues.
Types of P&L statements
There are two types of P&Ls: the cash accounting method and the accrual method.
The cash accounting method only looks at the cash that has been received or paid. This approach is more common with smaller businesses.
The accrual method accounts for money that is earned, even if it is not yet received. It also tracks liabilities that haven’t yet become expenses.
What does a profit and loss statement look like?
Here is an example of a P&L statement (here called an income statement) for the Kraft Heinz Company. Notice that it includes details such as total revenue, operating expenses, and net income from various sources. While a P&L for a small business will likely look very different, this example can still offer useful information about how a successful company formats their statement.
What do P&L statements include?
A profit and loss statement should include:
- Total revenue
- Cost of good sold (COGS)
- Itemized expenses
- Net profit
- Gross profit
These are essentially different categories of income and expenses, and when added up will show where your company cash is going.
How to make a profit and loss statement
After you pick the time frame you want to analyze, here are the steps to follow to create your own P&L statement.
- Calculate the total revenue. The amount will differ depending on whether you use the accrual method or the cash accounting method, so make sure you know which system you’re using.
- Determine the COGS. This includes both the direct and indirect costs of goods sold.
- Subtract COGS from revenue. The resulting amount is your gross profit.
- Calculate the operating expenses. Look at everything your company has to pay for in order to stay in business, including rent, advertising costs, and employee salaries. Subtract this amount from the gross profit to determine total operating revenue.
- Determine other income and expenses. If there are any income or costs not included in the previous calculations, add them in. The result is the company’s EBITDA (earnings before interest, taxes, depreciation, and amortization).
- Find the net profit. This is where taxes come in. Subtract income tax, state tax, and any other deductions that will affect net profits.
Try downloading our profit and loss statement template. Use the template instructions in the excel file to get started.
Single-step vs. Multi-step P&L statements
A P&L statement can be either single-step or multi-step. To understand what that means, we have to step back a little. Every publicly traded company is required to use Generally Accepted Accounting Principles (GAAP) created by the Financial Accounting Standards Board (FASB), and many private companies choose to comply with GAAP as well. GAAP outlines options for either single-step or multi-step P&L statements.
A single-step P&L is pretty simple: it shows revenue, expenses, and net income. It makes for easier record keeping, but it may also lack important information that would be useful for your business. This method is more popular with P&L statements than income statements.
A multi-step P&L is more common with larger, publicly traded companies. In addition to tracking revenue, expense, and net income, it will categorize expenses as either direct costs or indirect costs. This means the document includes a gross profit calculation and an operating income calculation, which can offer a clearer picture of how a business is run. Multi-step processes are more common in income statements than P&L statements.
Other names for P&L statements
This financial statement goes by many names, but they all describe the same thing: a document with a company’s revenue and expenses. The most common terms—”profit and loss statement” and “income statement”—are used interchangeably, but they can mean slightly different things to different kinds of businesses.
Profit and loss statement—Mostly used by small businesses or during internal conversations. Unlike an income statement, these are usually prepared on a cash basis (but not always).
Income statement— These are mostly used by medium-sized and enterprise level businesses. This is a commonly used term when reporting financials to investors, stakeholders, banks, owners, board of directors, and auditors. They are usually, but not always, prepared on an accrual accounting basis.
Statement of operations—Mostly used in publicly-traded US companies.
Statement of earnings—Not very popular, but occasionally the banking industry will use this term.
Statement of activities—This is only used by charitable organizations classified as 501(c)(3).
P&L statements vs. balance sheets
Both documents are important to your business for different reasons, and they cover different aspects of company finances.
A balance sheet takes into account more factors than a P&L statement. While a profit and loss statement shows income and expenses, a balance sheet offers information about assets, liabilities, and stockholder equity.
A balance sheet can also offer greater insight into the liquidity of a company’s finances, while a P&L is more focused on overall financial results.
Why P&L statements matter
Potential investors will want to check out your P&L statements to see if your company is spending money wisely. And for the sake of transparency, all publicly traded companies are required to release a P&L statement every year.
But even if these factors don’t apply to your organization, a P&L statement provides important insight into the financial health of your business. Business owners should be familiar with their P&Ls so they can make smarter day-to-day decisions. Knowing where your money is going can help you take your company in the right direction.
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