What Is on a Profit and Loss Statement?

A Profit and Loss (P&L) statement, often called an income statement, summarizes a company’s revenues, costs, and expenses over a specific period, such as a fiscal quarter or year. It provides a clear picture of how much profit or loss a company generated. Understanding the P&L statement is fundamental for assessing a business’s financial health and its ability to create wealth.

The P&L statement illustrates a company’s profitability over time. It contrasts the money a business brings in with the money it spends, revealing the “bottom line” profit or loss. This report is used by business owners, investors, and lenders to evaluate operational efficiency and make informed decisions about future strategies or investments.

Understanding Revenue

Revenue represents the total money a company generates from its primary business activities, such as selling goods or providing services. It is commonly referred to as the “top line” of the P&L statement because it is the starting point for calculating profitability. Revenue is recognized when earned and realized, meaning goods or services have been delivered or performed, not necessarily when cash is received.

Gross revenue is the total income from sales before any deductions. Net revenue, also known as net sales, subtracts returns, allowances, and discounts from gross revenue. This provides a more accurate reflection of the money actually retained from sales. For instance, if a retail store’s gross revenue is $500,000, but after $50,000 in returns and discounts, its net revenue is $450,000.

Manufacturing companies typically generate revenue from selling produced goods, while software companies might earn through subscription fees. Service-based businesses, like consulting firms, recognize revenue from fees charged for professional services.

Calculating Cost of Goods Sold

The Cost of Goods Sold (COGS) represents the direct costs attributable to the production of goods or services a company sells. This line item is subtracted from revenue to determine a business’s gross profit. COGS includes expenses that increase or decrease directly with the volume of production or sales.

Components of COGS typically include raw materials, direct labor involved in the production process, and manufacturing overhead tied to creating the product. For a furniture manufacturer, direct materials include wood and screws, while direct labor is wages paid to carpenters assembling the furniture. In retail, COGS primarily consists of the wholesale purchase price of products intended for resale.

For a service business, COGS might include direct labor costs of employees providing the service, such as a consultant’s hours billed directly to a client project. Understanding COGS is important because it directly impacts gross profit, which is a key indicator of how efficiently a business manages its production costs.

Identifying Operating Expenses

Operating expenses are costs incurred in the normal course of running a business that are not directly tied to production. These expenses are sometimes referred to as overhead and are necessary to keep the business functioning day-to-day. Operating expenses are deducted from gross profit to arrive at operating income.

These costs typically fall under selling, general, and administrative (SG&A) expenses. Selling expenses include marketing, advertising, sales commissions, and distribution, which are incurred to promote and sell products or services. General and administrative expenses cover broader management costs, such as office rent, utilities, and office supplies.

Other common operating expenses include salaries and wages for administrative staff, non-production employees, employee benefits, and payroll taxes. Professional fees for accounting, legal services, and general business insurance also fall into this category. Depreciation on office equipment or vehicles used for administrative purposes is another common operating expense.

Considering Other Income and Expenses

Beyond core operations, a P&L statement includes “other income” and “other expenses.” These are revenues and costs not directly related to a company’s primary business activities. This section captures non-operating financial events, typically presented after operating income but before taxes.

Examples of other income include interest earned from bank accounts or investments, dividend income from equity holdings, or gains from selling assets like old equipment. This income is distinct from sales revenue because it does not come from the company’s main line of business.

Conversely, other expenses encompass costs outside of normal operations, such as interest paid on loans or losses from selling assets for less than their book value. Legal settlements or restructuring charges might also appear here if not part of regular operating activities. Separating these items helps stakeholders understand profitability from the company’s core business.

Arriving at Net Income

Net income, often referred to as the “bottom line,” is the final result presented on the P&L statement. It represents the total profit or loss a company generated after accounting for all revenues, costs, operating expenses, other income and expenses, and taxes. This figure is the ultimate indicator of a business’s profitability over a specific period.

The calculation of net income begins with operating income. Any other income is added, and other expenses are subtracted, yielding income before taxes. Finally, income tax expense is subtracted to arrive at net income. For example, if a company has an operating income of $1,000, $50 of interest income, $20 of interest expense, and $150 in taxes, its net income would be $880.

Net income signifies the money a business has left. This can be retained for reinvestment into the company, used to pay down debt, or distributed to owners or shareholders as dividends. A positive net income indicates profitability, while a net loss suggests the company’s expenses exceeded its revenues during the period.