What Information Is on a Profit and Loss Statement?
Understand the core financial report that reveals a business's true economic health and operational success.
A Profit and Loss (P&L) statement, also known as an Income Statement, provides a summary of a company’s financial performance over a specific period, such as a month, quarter, or a full year. This report offers insights into how a business generated earnings and managed costs. It serves as a tool to assess a company’s ability to generate revenue and control expenses.
Revenue and Income
Revenue, often referred to as sales or income, represents the total money a business earns from its primary activities, such as selling goods or providing services. Common sources of revenue include sales from products, fees for services rendered, or even interest earned on investments.
Under accrual accounting, revenue is recognized when earned, not when cash is received. This means revenue is recorded when a company delivers goods or services to a customer. For instance, if a service is completed in December but payment is received in January, the revenue is still recorded in December. This approach provides a more accurate depiction of economic activity.
Expenses and Costs
Expenses are the financial outflows a business incurs to generate its revenue. They include operational outlays necessary for a business to function and produce income.
Similar to revenue, expenses are recognized when incurred, not when cash is paid. This principle, known as the matching principle, ensures that costs are recorded in the same accounting period as the revenue they helped generate. Examples of common business expenses include the cost of goods sold (direct costs of producing products), employee salaries, rent, utility bills, marketing expenditures, and depreciation of assets.
Calculating Profit or Loss
The Profit and Loss statement combines a company’s revenues and expenses to determine its profit or loss for a period. The fundamental calculation involves subtracting total expenses from total revenue. If revenue exceeds expenses, the result is a profit; if expenses are higher, the result is a loss.
The P&L statement presents different levels of profitability. Gross profit is calculated by subtracting the cost of goods sold from revenue. Operating income is derived by subtracting operating expenses from gross profit. Net income, or the “bottom line,” is reached after deducting all expenses, including interest and taxes, from revenue. A positive net income indicates that the business has earnings available for reinvestment or distribution, while a net loss signals that the business spent more than it earned, prompting operational adjustments.