A profit and loss (P&L) statement is a type of financial report that summarizes your company’s revenue, expenses and net income or losses over a particular period of time. Also known as an “income report,” a P&L statement gives you useful information about your company’s financial health, and it lets you get a sense of your business’s ability to generate profit through increasing revenue or reducing costs.
You can use a simple spreadsheet or accounting software like QuickBooks Online, to generate P&L statements on either a cash or accrual basis. Profit and loss statements are one of the main financial statements your business will rely on.
Let’s look deeper into what a P&L statement is and how it can help your business succeed.
How profit and loss (P&L) statements work
P&L statements follow a simple formula: They add together your various revenue numbers for a chosen time period, minus any losses you incurred. The end result sums up your net profit, or net loss.
While the basic formula is very simple, P&L statements can be complicated to put together. There are many different ways you can organize your P&L depending on who needs the information, and there are different ways you can categorize revenues or losses. You can make a profit and loss statement extremely detailed, or it can represent broader categories of revenue sources and expenses.
These reports can also be made for any period of time, although it’s most common to generate P&L statements once per quarter.
How do you create a P&L statement?
There are many different tools you can use to put together a profit and loss statement, the most common being spreadsheets or software, including accounting software and ERP software.
Software tools that can help you create P&L statements:
For beginners, the best accounting software offers templates or reporting tools that make it easy to create income reports and profit and loss statements based on gathered data. Many software platforms offer accounting apps that help keep your expense data tidy.
Why are profit and loss (P&L) statements important?
Profit and loss statements are useful for many business purposes, but a couple of the most important uses for a P&L statement are showing profitability and making data-driven decisions as you plan for the future.
Show how profitable your business is over time
Even if your business just had a really great month, a P&L statement is necessary to show how your business has performed over a longer period of time than just the last month or quarter. Business owners and other stakeholders need this information to get a high-level view of how the business is doing and which variables impact the bottom line.
Showing profitability over time is also useful if you need financing. P&L statements are one of the first things investors and banks are going to ask for to get a sense of whether or not your business could be a worthwhile investment.
Help business owners plan for the future
You can’t forecast revenue and losses in the future if you don’t know how your business has performed in the past. P&L statements can help you project future performance and use data to plan for the future.
How many people should you hire next year? How much should you invest in inventory? How big of a hit did that loss in Q3 cause? Profit and loss statements are necessary to answer all of these questions and more.
Components of a profit and loss statement (P&L)
There are 10 main components to a standard P&L statement:
- Revenue.
- Gross profit.
- Cost of goods sold (COGS).
- Operating expenses.
- Depreciation and amortization.
- Interest expense.
- Taxes.
- Operating income.
- Earnings before interest, taxes, depreciation and amortization (EBITDA).
- Net income.
Things like revenue, operating income and gross profit have to do with how much money your business earns throughout the specified period of time. Factors like COGS, depreciation/amortization, operating expenses and taxes represent losses your business has incurred.
Ultimately, net income is the bottom line of your P&L statement. It shows how much money your business made after all other costs were settled. EBITDA can also be a useful bottom-line metric, depending on which financial factors you want to highlight. EBITDA is how much money your business makes before interest, taxes, depreciation and amortization.
Keep in mind that for accurate and useful profit and loss statements, you’ll need to have implemented generally accepted accounting principles (GAAP). These include using best practices for things such as single- or double-entry accounting and maintaining a comprehensive chart of accounts.
Types of profit and loss (P&L) statements
P&L statements are highly customizable, and you can assess various time periods or financial factors to generate the most useful results. Some common types of P&L statements include:
- Standard.
- Budgeted.
- Comparative.
- Multi-step.
- Consolidated.
- Contribution.
The type of profit and loss statement you choose depends on what you want to use it for. If you want information that will help you forecast how much revenue you can expect by a particular time, then you want a budgeted P&L. If you want to compare numbers for different time periods to see how your business performs at a certain time of year, then you’ll need a comparative P&L.
Accounting software that offers customizable reports usually makes it easy to generate multiple types of P&L statements depending on your individual business needs. Larger businesses might need enterprise accounting software to drill down into complex variables and manage larger datasets.
Profit and loss (P&L) statement example
If you’re somewhat new to bookkeeping or accounting, then all the possible variables and details can make P&L statements seem intimidating. But they can be simple as well. Let’s look at a simple example P&L statement for a hypothetical retail shop:
| Time period | 1/1/2023 to 12/31/2023 |
|---|---|
| Revenue | $300,000 |
| COGS | $110,000 |
| Gross profit | $190,000 |
| Operating expenses | $101,000 |
| EBITDA | $89,000 |
| Operating income | $81,000 |
| Interest expense | $5,000 |
| Taxes | $15,200 |
| Net income | $60,800 |
After accounting for everything else, the net income shows how much this retail shop has made over the course of the year.
Even using only high-level details, a P&L statement can still give you useful information about a business.
