Profit and Loss Statement Meaning, Importance, Types, and Examples

What Is a Profit and Loss (P&L) Statement?

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. P&L statements are often presented on a cash or accrual basis. Company managers and investors use P&L statements to analyze the financial health of a company.

Key Takeaways

  • The profit and loss (P&L) 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 that 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 overall financial performance.
  • Statements are prepared using the cash method 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 that 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.

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Comparing P&L Statements

It is important to compare income statements from different accounting periods. The reason behind this is that 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.

 

Comparing one company’s P&L statement with another in the same industry that is similar in size can further help investors evaluate the financial well-being of a company. For example, doing so might reveal that one company is more efficient at managing expenses and has better growth potential than the other.  

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.

Example of a Profit and Loss (P&L) Statement

Below is the income or P&L statement for 2020 and 2021 for hypothetical company Butterfly Industries. All of the figures are in U.S. dollar (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 the cash flow statement, the income statement provides an in-depth look at a company’s financial performance.

Why are profit and loss (P&L) statements important?

A profit and loss (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 equity (as shown on the balance sheet).

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