What Is a Profit and Loss Statement? How to Write a P&L Statement

A profit and loss statement, also known as an income statement, net income statement, or a statement of earnings, is a financial statement that details a company’s revenue, expenses, and losses over a specific time period (typically one fiscal year) in order to show the company’s net profit (or net loss). These statements are useful for both big corporations, as well as small business owners.

Publicly traded companies are required by the Securities and Exchange Commission to release profit and loss statements every year, in an effort to make corporate business finances transparent. A profit and loss statement is one of the three most important financial statements in business accounting, along with a balance sheet and a cash flow statement (also called a statement of cash flow).

An income statement is the same thing as a profit and loss statement, with the two terms used interchangeably. A profit and loss statement shows a company’s total income, summing up revenue and business costs in order to find their net profit for a given period of time.

A balance sheet offers a more holistic topline snapshot of a company's financial health and business activities. It considers all forms of a company assets, liabilities, and stockholder equity. In doing so, it can provide a broader financial image of the company than an income statement can. However, it lacks the quotidian detail of cash flow that a proper income statement can offer. Here are the four key differences between a profit and loss statement or income statement and a balance sheet.

• Period of time: While an income statement illustrates an organization’s results throughout an accounting period, a balance sheet shows its financial situation at a specific point in time.
• Financial activity: An income statement showcases expenses and revenues, while a balance sheet reports total liabilities, total assets, and equity.
• Liquidity: Liquidity is determined by comparing line items on a balance sheet. An income statement, in contrast, gives the operating income percentage, net income percentage, and gross margin percentage.
• Assessment: A company’s management uses a balance sheet to determine if a business can meet its obligations with sufficient liquidity. The income statement, however, is helpful to examine results and discover financial or operational issues.

A well-run company’s accounting system will make both profit and loss statements and balance sheets available to shareholders and managers. Potential investors will expect access to balance sheets, but not all will expect to see income statements. The level of detail depends upon the specific relationship between the company and the investor.

When preparing a profit and loss or income statement, there are a few main categories your financial report should cover. Below are some important sections to include in your profit and loss statement.

1. 1. Total revenue: Revenue (also called sales revenue or operating income) is the income that your company received from its normal business operations.
2. 2. Cost of goods sold: The cost of goods sold (also called COGS or cost of sales) is the direct cost of the goods or services that your company sells—for instance, the price your company pays to make the product it sells, including the raw material and labor costs.
3. 3. Itemized expenses: All income statements should have a detailed list of individual expenses—from rent; to selling, general, and administrative expenses (SG&A); to equipment and marketing expenses. Many companies will also include depreciation expenses in their total expenses, to show the cost of their fixed assets. Some companies separate their expenses into operating costs (internal day-to-day expenses that you have more control over) and non-operating expenses (like income taxes and interest expenses, which are external). Separating the expenses this way allows companies to calculate their operating profits.
4. 4. Net profit: Your company’s net profit (also called net sales or net earnings) is the gross profit minus expenses, and is the final line on your income statement. This is the numeric indicator of how your company profited or lost during a specific period of time, whether you’re compiling a monthly, quarterly, or annual income statement.
5. 5. Gross profit: Gross profit is your total revenue minus your COGS—in other words, it’s how much your company would have made if it incurred absolutely no other expenses. Gross profit isn’t necessary to list on an income statement, but it’s a great way to put your expenses in perspective.

Creating a profit and loss report can help you visualize, organize, and optimize your business’s financial performance in a way that sets you up for future success. Each figure on a profit and loss statement is organized as an individual line item, allowing you to keep track of your revenue and expenses. Here is how to create a profit and loss statement.

1. 1. Set your time frame. P&L statements contain data about a company’s finances over a specified period of time, like a quarter of a year or an entire year. You can also choose a smaller amount of time, such as a month.
2. 2. Calculate the revenue. Add up all your company’s cash income as well as numbers in accounts receivable for the time period you have selected. Even if your business has not collected what it is owed yet, include figures from your accounts payable in your revenue calculations. Following the principles of accrual accounting, the assumption is that the business will be paid for the services rendered, and you want to include those numbers in your sheet.
3. 3. Calculate your COGS. Next, you need to calculate both the direct and indirect costs of all materials, supplies, and other purchases. Direct costs will include items like raw materials and labor, whereas indirect costs will include items like factory overhead or maintenance workers.
4. 4. Establish your gross profit. Subtract the COGS from your total revenue to find out your gross profit.
5. 5. Find your operating expenses and SG&A. These terms are synonymous for most businesses, though they often get their own line items. Operating expenses pertain to production costs like salaries, rent, and utilities. SG&A expenses (standing for selling, general, and administrative expenses) pertain to non-operating costs, like advertising, legal expenses, and any other costs not directly associated with manufacturing your products or services. Once you have these numbers, subtract them from your gross profit to find your total operating revenue.
6. 6. Add in other income and expenses. Include income that your business expects to receive from other sources such as dividends, interest income, capital asset sales, and royalties, as well as any unexpected losses. Add this other income to your operating profit, which will give you your total earnings before interest, taxes, depreciation, and amortization (EBITDA).
7. 7. Obtain your net profit. Estimate the amount of income tax and state tax, as well as other deductions that will affect the gross profit of your business. Subtract these totals from your EBITDA to determine what the estimated net income (or net profit) for your business will be.

A P&L statement can function as your business’ statement of profit, giving you an accurate assessment of your company’s income by subtracting your expenses from your revenue. Here are some other potential advantages of analyzing a profit and loss statement for your business.

1. 1. It makes it simpler to plan for the future. A P&L statement can make it much easier to make decisions for your company’s future expenses. Knowing your current financial status and how your future income might be impacted can help you prioritize what decisions need to be made for the health of your business.
2. 2. It indicates the health of your business. A P&L statement can show you the current financial status of your business, which can alert you to any issues happening within your company that you didn’t know about.
3. 3. It can lure in more investors. Knowing you’re on the right track for a healthy, profitable business can attract investors who are looking for a promising company to sink their money into. More money for your business means you can spend more on things like optimizing operations, marketing, and employment—all of which can maximize the profit of your business.

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