What is a profit and loss (P&L) statement?

A profit and loss (P&L) statement, also known as an income statement, is a key financial report that summarizes a company’s revenues, costs, expenses, and resulting profit or loss over a specific period (such as a month, quarter, or year). It provides a clear picture of a business’s ability to generate income, manage expenses, and achieve profitability, making it essential for management, investors, and creditors.

Key takeaways

Financial performance snapshot

The P&L statement shows how much money a business earned and spent during a period, revealing whether it made a profit or incurred a loss.

Core financial statement

It is one of the three primary financial statements (alongside the balance sheet and cash flow statement) used to assess a company’s financial health.

Tracks profitability over time

By comparing P&L statements from different periods, businesses can track performance trends, identify strengths and weaknesses, and make informed decisions.

Required for reporting and analysis

Public companies must issue P&L statements regularly to meet regulatory requirements and inform stakeholders.

Why the P&L statement matters?

The Profit and Loss (P&L) statement measures how efficiently a company turns revenue into profit, providing insights into operational efficiency and cost control. It serves as a vital decision-making tool for management in budgeting, strategy, and resource allocation, while also helping investors and lenders assess profitability and risk. Additionally, the P&L facilitates benchmarking by enabling comparisons with industry peers and historical performance, highlighting areas for potential improvement.

The P&L statement preparation process

Choose the reporting period

Decide whether the statement will cover a month, quarter, or year.

Gather financial data

Collect information on all revenues and expenses for the period.

List revenues

Record all income from sales or services.

Subtract COGS

Deduct direct costs to arrive at gross profit.

Deduct operating expenses

Subtract indirect business costs.

Include other income/expenses

Add or subtract non-operating items like interest or asset sales.

Calculate net profit

The final figure shows whether the business made a profit or loss.

Impact on business and financial decisions

Profitability: Shows if the business is earning or losing money

Cost control: Identifies areas where expenses can be reduced

Investor relations: Provides transparency for investors and lenders

Strategic planning: Informs future budgeting, expansion, or restructuring decisions

Real-world examples

Case study: Lite Apparel

A small business, "Lite Apparel," manufactures and sells clothing. In December, it generated $100,000 in sales revenue, earned $9,000 from selling scrap materials, and received $4,000 in interest income, totaling $113,000 in revenues. The company’s expenses for the month included $60,000 for the cost of goods sold, $5,500 in rent, $15,000 in wages, $7,700 in depreciation, and $9,000 in utilities, amounting to $97,200 in total expenses. After subtracting expenses from revenues, Lite Apparel reported a net income of $15,800 for December. This P&L statement allows management to clearly see how revenue is converted into profit, assess operational efficiency, and compare performance against previous months or industry benchmarks to identify areas for improvement.