A P and L Statement, also known as an ‘income statement’ or ‘profit and loss statement,’ is a financial document that details the revenues, costs, and expenses of a company incurred during a specific period, generally a quarter or fiscal year.
The statement helps to understand a company’s ability or inability to generate profit by categorizing revenues and expenses.
What Does a P and L Statement Say About a Company?
Every public company issues three financial statements quarterly and annually. The profit and loss statement is one of those three statements. The other two are the balance sheet and the cash flow statement.
A P and L statement exhibits:
A company’s health
A requirement to acquire financing
A requirement by the Partnership Act or Companies Act
Allows investors and banks to be transparent with your business’s total income, debt, and financial ability
What is the Benefit of a P and L Statement?
A P and L statement is generated quarterly and annually, so it helps an organization examine its financial health and ability to gain profits to identify the problems or flaws in the business strategy.
Moreover, the company can spot trends by analyzing the changes in the profit and loss statements of different years. For example, if the demand decreases and the cost of goods sold increases, it may indicate that the company will hit a fall in profitability.
The statement also helps to give an in-depth understanding of the company's expenses and cash flow, allowing the company to control and balance its strategies for future profitability and success.
What is the Importance of a Profit and Loss Statement?
A P and L statement is important because many companies have to complete it quarterly or yearly as mandated by the law or the associated membership.
Moreover, comparing profit and loss statements allow companies to:
Meet all the taxes. Companies can use their P&L statements to fill up their tax form for efficient work.
Plan for the future. P&L statements help indicate flaws and trends in the company's revenues, costs, and expenses, allowing them to work strategically by lowering costs and increasing revenues. Thus, forming a profit-maximizing strategy for the future.
Understand where the expenses are high and cut them down. Usually, a company incurs loss due to not understanding the costs. For example, a company may be profiting 10% a month, but somehow the profit is lost between expenses which are 12%, resulting in a 2% loss. P&L statements help to identify the areas where the costs need minimizing.
What are the Components of a Profit and Loss Report?
An organization must add additional components besides revenues and expenses. The report must comprise of:
A company's revenue includes product sales, services, and non-operating revenues that are not directly linked to the company, such as the interest of accounts, rental incomes, etc.
2. Gross Profit
It indicates the net revenue without the sales cost. It is also known as gross margin or gross income.
3. Net Profit
It indicates the total earnings after the deduction of the expenses. P&L mainly calculates net income. To do so, it just adds all the revenues and gross profits and then deducts the expenses and losses.
It includes all the operating costs, like the cost of goods sold (COGS), employee salary, taxes, commissions, utilities, and transport. Paying off interest also counts as an expense of the company.
It includes the losses in a one-time event, such as a court settlement or loan payment.
6. Earnings Per Share (EPS)
It only applies to a company with shareholders. It mainly calculates how much each shareholder will receive if the organization’s net profit distribution takes place.
What are the Types of P&L Statements?
An organization should prepare a P and L statement in one of two ways—the cash and the accrual.
1. The Cash Method
The cash method or the cash accounting method is used when cash flows in as revenue and flows out as a company's liability. Small businesses commonly adopt this method to keep track of transactions and personal finances efficiently.
2. The Accrual Method
The accrual method calculates the revenue and expenses as earned or paid off. For example, even if a service or product payment hasn’t gone through, it is still recorded as revenue. The same is for any liabilities which are yet to be paid off by a company.
How to Calculate Profit and Loss of a Business?
Nowadays, profit and loss can be calculated using software specially made for the purpose. If you still wish to learn, here’s how.
Subtract the total expenses of the company’s revenues for a particular set period. The formula for profit and loss calculation:
For a more detailed explanation, here are eight steps to help you calculate the profit and loss.
Calculate the revenue.
Calculate the COGS and services sold.
Deduct the value of COGS and services from the total revenue to get gross profit.
Calculate operating expenses, including utilities, transport, rent, etc.
Deduct the result of operating expenses from the gross profit value (step 3) to get your total operating profit.
Add interest incomes or dividends to the total operating profit to get your earnings before interest, taxes, depreciation, and amortization (EBITDA).
Add and calculate all the interest payments, due taxes, depreciation, and amortization.
Deduct the value of step 7 from the EBITDA value of step 6 to get your total net profit.