The Profit & Loss statement or P&L is an account compiled to show a business’s revenue, expenses, and net income over a given period of time.
Usually, the statement is made quarterly and annually, some companies also prepare it monthly. The revenue section covers how much money your business brought in for that period, and subtracts the cost of creating your products to show your gross profitability. The expenses section showing the total expenditure over the period and breaks out different categories of spending to show how much you spent in each area. It also subtracts your expenses from your gross profit, to determine if your business is operating at an overall profit or a loss.
Along with your balance sheet and statement of cash flows, the P&L statement helps you keep an eye on the financial health of a business. They help business leaders determine if a company is trending toward profitability or losses.
Basic Structure Of Profit And Loss Statement
A profit and loss statement has 5 main sections:
Income:
Income is broadly defined as the amount of money that the company receives during the period we are tracking - such as sales of the product or service. It also includes discounts, credits, and refunds as well.
Costs of Goods Sold (COGS):
Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company. This amount includes the cost of manufacturing labor, inventory, and supplies.
Expenses
These are the expenses a company encounters to keep the business running such as advertising, general and administrative, utilities, salaries, rents, office expenses, research and development, depreciation, and amortization.
Other Income/Expenses
The next section of the P&L Statement is the Other Income and Expenses section. Not all company’s P&L will include this section. This section will include your secondary activities such as investment income, interest expense, gains and losses, taxes, and other non-recurring events
Net Income
This is the grand total of all of the company’s revenue and other income less all of the company’s expenses (COGS, operating expenses, depreciation, amortization, and other expenses).
Here is a profit and loss statement example:
Let’s talk about the first four sections first: income, COGS, expenses, and other income/expenses.
All four of these sections are structured the same way. There’s a line for every income or expense category and subcategory that you use in your business. Each line shows you the total earned or spent in that category for the time period that you’re creating the P&L statement for.
If you use subcategories in your accounting, you’ll also see a subtotal of the subcategories directly under the list of itemized subcategory amounts.
At the very bottom of the income, COGS, and expense sections, there is a total for that section so you can see the total amount you spent or earned.
Gross Profit: Revenue — COGS = Gross Profit.
Gross Profit will not include other expenses, but it will provide insight into whether you are pricing your product/service correctly or discounting too much.
The final section of a profit and loss statement is your Net Income.
Net Income = (Income – COGS– Expenses – Other Expenses) + Other Income
If your net income is a positive number, it means that you earned more than you spent and you have profit. If your net income is a negative number, it means you spent more than you earned and you have a loss.
You need to Check Your P&L Statement regularly. Your P&L statement won’t do you much good if you never check it. Make it a habit to do P&L analysis each month to stay up-to-date on your business’s financial health. If you only analyze it quarterly, you could miss out on important opportunities or discover problems far too late.
It is important to compare income statements from different accounting periods, as the changes in revenues, operating costs, research and development spending, and net earnings over time are more meaningful than the numbers themselves. For example, a company's revenues may grow, but its expenses might grow at a faster rate.
By understanding your business financials, you’ll be primed to secure the best financing and make the most informed financial decisions for your business.
If you, as a business owner, see that you cannot handle accounting on your own, consider hiring an accountancy service for contractors to help you with it.
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