How to Build a Profit & Loss (P&L) Statement
Learn to create a P&L statement to clearly understand your business's financial performance and profitability over time.
A Profit & Loss (P&L) statement, also known as an Income Statement, summarizes a company’s financial performance over a specific period. It details revenues earned and expenses incurred, revealing whether a business generated a net profit or incurred a net loss. It offers a clear picture of a business’s ability to generate sales, manage costs, and achieve profitability.
The P&L statement is a tool for understanding financial health and operational efficiency. Unlike a balance sheet, which presents a snapshot of assets and liabilities at a single point in time, the P&L covers a defined period, such as a month, quarter, or year. This periodic reporting allows owners, investors, and lenders to assess performance and make informed decisions.
Identifying Key Financial Information
Building a P&L statement begins with gathering and categorizing financial transactions. Key components include revenues, cost of goods sold (COGS), operating expenses, and other income and expenses.
Revenue is the total income from primary activities, such as sales of goods or services. This includes all sales, even those on credit. It is the starting point for calculating profitability and reflects the top line.
For businesses selling physical products, COGS includes direct costs of producing or acquiring goods sold, such as raw materials, direct labor, and manufacturing overhead. For example, a product sold for $100 that cost $20 to produce has a COGS of $20.
Operating expenses are costs incurred in day-to-day business operations not directly tied to production. These include rent, utilities, salaries, marketing, office supplies, and depreciation. Categorizing these expenses helps understand spending outside of direct production.
Other income and expenses cover non-operating activities. This includes items not related to core business, such as interest earned on investments or interest paid on loans. Gains or losses from asset sales also fall here.
Businesses rely on various financial records to collect this information. Sales invoices detail revenue, while purchase receipts and vendor bills document expenses. Bank and credit card statements record cash flows. Payroll records supply employee compensation data, and accounting software reports consolidate information. Maintaining organized records ensures P&L accuracy.
Structuring the Statement and Entering Data
After identifying and categorizing financial information, structure the P&L statement and populate it with data. The P&L follows a standard format, presenting information sequentially to arrive at the final profit or loss. This requires aggregation and calculation within specific reporting periods.
First, revenues are listed and totaled at the top. This section reflects gross sales during the reporting period. For example, if a business generated $50,000 from goods and $10,000 from services, total revenue would be $60,000.
Next, COGS is subtracted from total revenue to calculate Gross Profit. This indicates profitability of core products or services before operating expenses. If total revenue was $60,000 and COGS was $20,000, gross profit would be $40,000.
Following Gross Profit, operating expenses are listed and summed. These expenses, such as rent, utilities, and salaries, are subtracted from Gross Profit to arrive at Operating Income, also called Earnings Before Interest and Taxes (EBIT). This figure shows profitability of primary operations. For instance, if gross profit was $40,000 and total operating expenses were $15,000, operating income would be $25,000.
Finally, other income and expenses are included. Non-operating income, like interest income, is added to Operating Income, while non-operating expenses, such as interest expense, are subtracted. The result is Net Income or Net Loss for the period. This figure indicates overall profitability.
The P&L statement is prepared for a specific accounting period: a month, quarter, or year. Businesses commonly use calendar years (January 1 to December 31) or a fiscal year (any consecutive 12-month period). Ensuring all revenues and expenses fall within the chosen period is important for accurate reporting.
Understanding the Completed Statement
Once complete, each P&L subtotal provides insights into a business’s financial performance. Understanding these figures helps interpret the enterprise’s overall health. The statement progresses from top-line revenue to the final net profit or loss.
Gross Profit indicates profitability related to core sales activities. It shows revenue remaining after covering direct costs of producing or acquiring goods or services. A healthy gross profit margin suggests effective management of production or purchasing costs relative to sales prices.
Operating Income, or EBIT, shows a company’s profitability from primary business operations. It is calculated after deducting all operating expenses from gross profit. It reflects efficiency in managing day-to-day administrative, selling, and general expenses, separate from non-operating items like interest or taxes.
Net Income (or Net Loss) is the P&L statement’s final figure. It is the total profit remaining after all revenues and expenses, both operating and non-operating. Positive net income signifies profitability, while a net loss indicates expenses exceeded revenues.
The P&L statement provides an overview of financial performance over time, not a static snapshot. Tracking these figures across periods helps business owners identify trends, assess operational effectiveness, and understand financial gains. This insight helps monitor the business’s trajectory.