Profit and Loss

The profit and loss (P&L) statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period, usually a fiscal quarter or year. The P&L statement is synonymous with the income statement. These records provide information about a company’s ability or inability to generate profit by increasing revenue, reducing costs or both.

The P&L statement is one of three financial statements every public company issues quarterly and annually, along with the balance sheet and the cash flow statement. It is often the most popular and common financial statement in a business plan as it quickly shows how much profit or loss was generated by a business.

The income statement, like the cash flow statement, shows changes in accounts over a set period. The balance sheet, on the other hand, is a snapshot, showing what the company owns and owes at a single moment. It is important to compare the income statement with the cash flow statement since, under the accrual method of accounting; a company can log revenues and expenses before cash changes hands.

The income statement follows a general form as seen in the example below. It begins with an entry for revenue, known as the top line, and subtracts the costs of doing business, including the cost of goods sold, operating expenses, tax expenses, and interest expenses. The difference, known as the bottom line, is net income, also referred to as profit or earnings. You can find many templates for creating a personal or business P&L statement online for free.

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.

Key Takeaways
 

• The P&L statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period.


• The P&L statement is one of three financial statements every public company issues quarterly and annually, along with the balance sheet and the cash flow statement.


• It is important to compare P&L statements from different accounting periods, as the changes in revenues, operating costs, R&D spending, and net earnings over time are more meaningful than the numbers themselves.


• Together with the balance sheet and cash flow statement, the P&L statement provides an in-depth look at a company’s financial performance.


• Advantages of Profit And Loss Account
  
  Main benefits or advantages of profit and loss account can be expressed as follows:


• Helps to Track Net Profit or Net Loss : One of the major benefits of preparing a profit and loss account is to track business performance in terms of net profit or a net loss.


• Helps to Track Indirect Expenses : Indirect expenses of the business of a particular accounting period can be tracked and measured with the help of information provided in the profit and loss account.


• Helps to Determine the Net Profit Ratio : Profit and loss account determines the net profit of the business for a particular period.
  Net Profit Ratio = Net Profit / Net Sales.


• Helps To Control Indirect Expenses : The profit and loss account provides data regarding the different indirect expenses of the business firm. It helps to control and minimize excess expenses to improve the profitability of the firm.


• Helps in Decision Making : Profit and loss account provides detailed information about, net profit, net loss and indirect expenses of the business which helps to compare the current profitability position with the profitability position of the previous period. So, it helps to predict future performance, makes plans and makes better decisions.