What Is Included in a Profit and Loss Statement?

A Profit and Loss (P&L) statement, often referred to as an income statement, provides a summary of a company’s financial performance over a specific period, such as a fiscal quarter or year. It details the revenues earned and the expenses incurred to generate those revenues, ultimately determining the business’s net profit or loss. This financial document serves as a window into a company’s operational efficiency and overall financial health, assisting stakeholders in understanding how effectively a business can convert its sales into profits.

Revenue Components

Revenue represents the total income generated from a company’s primary business activities before deducting any expenses. Sales revenue is typically the largest component, reflecting money earned from selling goods or services. This figure is often initially recorded as gross sales, which is the total amount received from customers.

However, the reported revenue on a P&L statement usually reflects net sales. Net sales are calculated by subtracting sales returns, allowances, and discounts from gross sales. For instance, if a customer returns a product, the revenue from that sale is reversed, reducing the net sales figure.

Beyond core sales, businesses might also generate other income. Examples include interest earned on bank accounts or short-term investments, or rental income from property not central to the business’s main operations. Such items are typically listed separately to distinguish them from income derived from the core business.

Cost of Goods Sold

Cost of Goods Sold (COGS) represents the direct costs associated with producing the goods or services that a company sells. This line item appears directly after revenue on the P&L statement. For a manufacturing business, COGS includes the cost of raw materials, the direct labor involved in production, and manufacturing overhead directly tied to the production process.

For a retail business, COGS would encompass the purchase price of the merchandise and any costs incurred to bring it to the point of sale, such as freight. Service-based businesses also have COGS, which might include direct labor costs of employees delivering the service or specific materials used in service provision. COGS is distinct from other expenses because it directly fluctuates with the volume of goods or services sold. This direct relationship makes COGS a key factor in determining a company’s gross profit.

Operating Expenses

Operating expenses are the costs a business incurs during its normal operations that are not directly tied to the production of goods or services. These expenses are essential for running the business but do not increase or decrease proportionally with each unit sold. Operating expenses are typically categorized to provide a clearer picture of where a company’s money is being spent to maintain its operations.

Selling, General, and Administrative (SG&A) expenses form a broad category of operating costs. Selling expenses include expenditures related to marketing, advertising campaigns, and sales commissions paid to staff. These costs are incurred to promote and distribute products or services to customers.

General and administrative expenses cover the day-to-day costs of managing the business. This includes rent for office spaces, utility bills, office supplies, and administrative salaries.

Depreciation, a non-cash expense, is also often included within operating expenses, reflecting the allocation of the cost of tangible assets over their useful life. For businesses engaged in innovation, Research and Development (R&D) expenses are also a form of operating expense, covering costs associated with developing new products or improving existing ones.

Non-Operating Items and Taxes

Non-operating items on a P&L statement include revenues and expenses that are not part of a company’s primary business activities. Interest income, for example, is earned from investments or money held in interest-bearing accounts, while interest expense arises from borrowing funds or outstanding loans.

Gains or losses from the sale of assets not used in regular operations, such as old equipment or unused property, also fall under non-operating items. These gains or losses are recognized when the selling price differs from the asset’s book value. Separating these items provides clarity, allowing stakeholders to assess the performance of the core business independently of these less frequent or non-recurring events.

Income tax expense is the final major deduction on the P&L statement, representing the amount of taxes a company owes on its taxable income. This expense is typically calculated based on the profit generated after all other operating and non-operating expenses have been accounted for.

Profit and Loss Calculations

The P&L statement is structured to show various levels of profitability, each providing a different insight into a company’s financial performance. The first level is gross profit, which is calculated by subtracting the Cost of Goods Sold (COGS) from net revenue. This figure indicates the profitability of a company’s core production or sales activities before considering operating expenses.

Moving down the statement, operating income, also known as Earnings Before Interest and Taxes (EBIT), is determined by subtracting all operating expenses from gross profit. Operating income reveals the profit generated from a company’s primary business operations, excluding the impact of financing costs and taxes.

Finally, net income, often referred to as the “bottom line,” is the ultimate measure of a company’s profitability for the period. It is calculated by taking operating income, adding any non-operating income, subtracting any non-operating expenses, and then deducting income tax expense. Net income represents the total profit or loss available to the company’s owners or shareholders after all costs and taxes have been paid.