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What is a Profit and Loss Statement (P&L)?
A profit and loss statement (P&L) is a financial report that summarizes a company’s revenues, costs, and expenses over a specific period to show whether it made a profit or loss.
Definition
A profit and loss statement is a financial statement that measures business performance by subtracting expenses from revenues during a defined period.
Key Takeaways
- Shows whether a business is profitable over a period.
- Summarizes revenue, expenses, and net income.
- Also known as an income statement.
Understanding the Profit and Loss Statement
The profit and loss statement is one of the three core financial statements, alongside the balance sheet and cash flow statement. It provides insight into operational performance and profitability.
P&L statements are typically prepared monthly, quarterly, or annually. They help management track cost trends, pricing effectiveness, and operational efficiency.
Unlike the cash flow statement, the P&L includes non-cash items such as depreciation and accruals, which reflect accounting performance rather than actual cash movement.
Structure of a Profit and Loss Statement
Revenue: Total income generated from sales.
Cost of Goods Sold (COGS): Direct costs of producing goods or services.
Gross Profit: Revenue minus COGS.
Operating Expenses: Selling, general, and administrative costs.
Operating Profit: Profit from core operations.
Net Profit (Net Income): Final profit after all expenses and taxes.
Real-World Example
A retail business reports $500,000 in revenue, $300,000 in costs and expenses, resulting in a net profit of $200,000 for the year. This information is summarized in its annual P&L statement.
Importance in Business or Economics
The P&L statement is critical for evaluating financial performance, informing strategic decisions, and communicating results to investors, lenders, and regulators. It also forms the basis for tax reporting and performance benchmarking.
Types or Variations
Single-Step P&L: Groups all revenues and expenses together.
Multi-Step P&L: Separates operating and non-operating items.
Contribution Margin P&L: Focuses on variable vs fixed costs.
Related Terms
- Balance Sheet
- Cash Flow Statement
- Income Statement
Sources and Further Reading
- Investopedia — Profit and Loss Statement
- Corporate Finance Institute — P&L Explained
- IRS — Income Statement Overview
Quick Reference
- Summarizes revenues and expenses.
- Indicates profitability over time.
- Core financial reporting tool.
Frequently Asked Questions (FAQs)
Is a P&L the same as an income statement?
Yes. The terms are commonly used interchangeably.
How often should a P&L be prepared?
Monthly or quarterly for management, annually for reporting.
Does a P&L show cash flow?
No. It shows profitability, not actual cash movement.
