Definition of Profit and Loss (P&L) Account | American News

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A profit and loss statement, or P&L, is a summary of a company’s revenues, costs, and expenses over a period of time, usually a quarter or fiscal year. Income statements show how much profit or loss has been generated or incurred by a business.

Along with balance sheets and cash flow statements, income statements are one of the three main financial information filed by public companies on a quarterly and annual basis. Together, they provide investors with complete and candid information about a company’s financial health.

Other terms for a P&L statement include “profit and loss statement”, “income and expense statement”, “operations statement”, and “income statement”. For non-profit organizations, income statements are often referred to as a “statement of activities” or “statement of support.”

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An income statement can be prepared in two main ways: the cash method or the accrual method.

Cash method. Under this method, the income statement only takes into account cash received and paid in full. A business using the cash method would record incoming cash transactions as income and outgoing cash transactions as liabilities. This method is more common for small businesses or sole proprietors with less complex operations. The cash method only takes into account the actual cash flowing in and out of the business.

Exercise method. Under this method, income and debts are recognized as soon as they are allocated. A business using the accrual method would record income or liabilities in its income statement as soon as it sells a product or service or incurs an expense, even if the money had not yet been received or debited. This is the difference between receipts and receipts. While revenue is recognized in the period when sales or services are provided, revenue is recorded when the money is actually transferred.

Income statement statements typically follow this format: the top entry begins with revenue, hence the term “top line”, then a business will subtract expenses, which may include the cost of goods and services sold ; research and development (R&D); sales, general and administrative (SG&A); depreciation and amortization, taxes and interest. The last entry is net income, hence the term “net income”, which is also commonly referred to as profit or profit.

As mentioned earlier, a P&L statement reports for a particular accounting period. Published income statements often specify the reporting period in this format, for example: “P&L for the year/quarter ended 31 January 2022”.

Below is a hypothetical P&L statement for the multinational ABC Enterprises Inc., for fiscal years 2021 and 2022.

When going through this P&L statement, start with the total revenue, then subtract the total cost from the revenue to arrive at the gross profit. From there, subtract the various operating expenses to get earnings before interest, taxes, depreciation and amortization, or EBITDA. Finally, by subtracting depreciation, interest charges and taxes, we obtain the net income. Investors can also compare the “2021” and “2022” columns to calculate the rates of change between the numbers for each year.

Investors can use income statement statements to assess the effectiveness of a company’s management by examining whether or not the company has a large turnover, maintains strong margins, manages expenses well and achieves the profitability. Comparing income statements from different time periods — year over year or quarter over quarter — can help investors determine whether a company is growing or not.

FAQs

A balance sheet is a snapshot of a company’s assets, liabilities, and equity at a given time, while an income statement shows income and expenses over a given period. The balance sheet is often used to assess a company’s liquidity and solvency using metrics such as debt, current, quick and working capital ratios. It shows what the company owns and owes, as well as the amount invested by shareholders. On the other hand, income statement statements are commonly used to assess a company’s historical margins, profitability, and growth trends. Balance sheets show the true value of a business, while income statements show whether a business is currently profitable or not.
US publicly traded companies are required to file quarterly and annual P&L statements as part of their financial reporting obligations with the US Securities and Exchange Commission, or SEC. These statements must follow generally accepted accounting principles, or GAAP, rules and guidelines. However, publicly traded (OTC) companies may not be required to file audited financial statements in some cases. Audited financial statements provide an independent and objective measure of assurance as to the accuracy and completeness of the financial statements submitted. Publicly traded stocks will have audited financial statements attested by an independent third party, often an accounting firm specializing in public practice. A public company’s income statement can be viewed on its website, usually on the investor relations page as part of its periodic disclosures.
The information in a P&L statement can help investors calculate several financial ratios, which can be used to assess company fundamentals and help gauge the intrinsic price of its shares. Examples include gross, operating and net profit margins, earnings per share, price to earnings (P/E) ratio and return on equity. Looking closely at an income statement and comparing different time periods can help investors assess management efficiency, profitability, and the company’s growth trajectory. Investors can compare the income statements and financial ratios of similar companies in the same sector or industry to assess whether or not a company is competitive with its peers. In particular, the comparison of different business income statements over different accounting periods is essential to assess positive or negative changes in revenues, expenses and net income over time. This will paint a better picture of how the business has been run historically.

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