What Is a Profit and Loss (P&L) Statement?
The term profit and loss (P&L) statement refers to a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period, usually a quarter or fiscal year. These records provide information about a company's ability or inability to generate profit by increasing revenue, reducing costs, or both. These statements are often presented on a cash or accrual basis.
- The profit and loss 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.
- When used together, the P&L statement, balance sheet, and cash flow statement provide an in-depth look at a company's financial performance together.
- Statements are prepared using the cash or accrual method of accounting.
- It is important to compare P&L statements from different accounting periods, as any changes over time become more meaningful than the numbers themselves.
How Profit and Loss (P&L) Statements Work
The P&L statement is one of three financial statements every public company issues on a quarterly and annual basis, 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 shows how much profit or loss was generated by a business.
P&L statements are also referred to as a(n):
- statement of profit and loss
- statement of operations
- statement of financial results or income
- earnings statement
- expense statement
- income statement
The P&L or income statement, like the cash flow statement, shows changes in accounts over a set period of time. 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.
This document 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.
P&L management refers to how a company handles its P&L statement through revenue and cost management.
It is important to compare income statements from different accounting periods. The reason behind this is because any changes in revenues, operating costs, research and development (R&D) spending, and net earnings over time are more meaningful than the numbers themselves. For example, a company's revenues may grow on a steady basis but its expenses might grow at a much faster rate.
Revenues and expenses for non-profit organizations are generally tracked in a financial report called the statement of activities. As such, this report is sometimes called a statement of financial activities or a statement of support.
Types of Profit and Loss (P&L) Statements
As noted above, a P&L statement may be prepared in one of two ways. These are the cash method and the accrual method.
The cash method, which is also called the cash accounting method, is only used when cash goes in and out of the business. This is a very simple method that only accounts for cash received or paid. A business records transactions as revenue whenever cash is received and as liabilities whenever cash is used to pay any bills or liabilities. This method is commonly used by smaller companies as well as people who want to manage their personal finances.
The accrual accounting method records revenue as it is earned. This means that a company using the accrual method accounts for money that it expects to receive in the future. For instance, a company that delivers a product or service to its customer records the revenue on its P&L statement, even though it hasn't yet received payment. Similarly, liabilities are accounted for even when the company hasn't for any expenses yet.
You can find many templates to create a personal or business P&L statement online for free.
Example of a Profit and Loss (P&L) Statement
Below is Caterpillar's income or P&L statement for 2013 and 2014. All of the figures are in USD millions except per-share data:
You can use the income statement to calculate several metrics, including the gross profit margin, the operating profit margin, the net profit margin, and the operating ratio. Together with the balance sheet and cash flow statement, the income statement provides an in-depth look at a company's financial performance.
|Twelve Months Ended December 31,||2014||2013|
|Sales and revenues:|
|Sales of Machinery, Energy & Transportation||52,142||52,694|
|Revenues of Financial Products
|Total sales and revenues||55,184||55,656|
|Cost of goods sold||39,767||40,727|
|Selling, general and administrative expenses||5,697||5,547|
|Research and development expenses||2,135||2,046|
|Interest expense of Financial Products||624||727|
|Other operating (income) expenses||1,633||981|
|Total operating costs||49,856||50,028|
|Interest expense excluding Financial Products||484||465|
|Other income (expense)||239||(35)|
|Consolidated profit before taxes||5,083||5,128|
|Provision (benefit) for income taxes||1,380||1,319|
|Profit of consolidated companies||3,703||3,809|
|Equity in profit (loss) of unconsolidated affiliated companies||8||(6)|
|Profit of consolidated and affiliated companies||3,711||3,803|
|Less: Profit (loss) attributable to noncontrolling interests||16||14|
|Profit [footnote 1: Profit attributable to common shareholders]||3,695||3,789|
|Profit per common share||5.99||5.87|
|Profit per common share – diluted [footnote 2: Diluted by assumed exercise of stock-based compensation awards using the treasury stock method]||5.88||5.75|
|Weighted-average common shares outstanding (millions)|
|- Diluted [see footnote 2]||628.9||658.6|
|Cash dividends declared per common share||2.70||2.32|
Why Are Profit and Loss Statements Important?
A P&L statement is one of the three types of financial statements prepared by companies. The other two are the balance sheet and the cash flow statement. The purpose of the P&L statement is to show a company's revenues and expenditures over a specified period of time, usually over one fiscal year.
Investors and analysts can use this information to assess the profitability of the company, often combining this information with insights from the other two financial statements. For instance, an investor might calculate a company’s return on equity (ROE) by comparing its net income (as shown on the P&L) to its level of shareholder’s equity (as shown on the balance sheet).
What Is the Difference Between a P&L Statement and a Balance Sheet?
A company's P&L shows its income, expenditures, and profitability over a period of time. The balance sheet, on the other hand, provides a snapshot of its assets and liabilities up to a certain date. The balance sheet is typically presented as of the last day of the company’s fiscal year. Investors use the balance sheet to understand the financial strength of the company, comparing the amount and quality of its assets against its liabilities.
Are All Companies Required to Prepare P&L Statements?
Publicly traded companies are required to prepare P&L statements and must file their financial statements with the Securities and Exchange Commission (SEC) so they can be scrutinized by investors, analysts, and regulators. Companies must comply with a set of rules and guidelines known as generally accepted accounting principles (GAAP) when they prepare these statements.
Private companies, on the other hand, are not necessarily required to comply with GAAP. Some smaller companies, though, may even not prepare formal financial statements at all.
U.S. Small Business Administration. "Financial Management for a Small Business," Page 16.
Cornell University, Legal Information Institute. "Accrual Method of Accounting."
Internal Revenue Service. "Publication 538 (Rev. January 2019)," Pages 8 - 10.
Internal Revenue Service. "Publication 538 (Rev. January 2019)," Pages 10 - 12.
U.S. Securities and Exchange Commission. "Caterpillar (Form 10-K)," Page 25.