A Profit and Loss (P&L) statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period, usually a quarter or fiscal year. It is one of the three primary financial statements that all companies should prepare and update on a regular basis, along with the balance sheet and the cash flow statement. The P&L statement is also known as an income statement, statement of profit and loss, statement of operations, statement of financial results or income, or earnings statement.
The purpose of the P&L statement is to show a company’s revenues and expenditures over a specified period of time, usually over one fiscal year. It summarizes all the activity recorded in a companys income and expenses accounts over the specified time. The statement includes a business’s total revenue, expenses, gains, and losses, arriving at net income for a specific accounting period. It shows whether a business has made a profit or a loss over that time.
P&L statements are important because they help measure a business’s success, enabling leadership to make more informed decisions. Management analyzes a P&L to determine how to increase profitability by increasing revenue, lowering costs, or both. A P&L statement is also a useful tool for lenders and investors that are evaluating a business for a loan or investment.
A P&L statement can be prepared using one of two accounting methods: cash or accrual. It can be very simple or extremely complex, depending on the level of detail required. A simple P&L typically provides a basic summary of financial data for a high-level overview of profits and losses, while a more detailed P&L may include granular data, such as a breakdown of sales and expenses by product line. P&Ls typically show comparative financials from previous periods, typically year over year, so analysts can compare changes in profits and losses over time.
In conclusion, a P&L statement is a crucial financial statement that summarizes a companys revenues and expenditures over a specified period, usually a quarter or fiscal year. It helps measure a businesss success and enables leadership to make informed decisions.
