Profit and loss statement definition
/What is a Profit and Loss Statement?
A profit and loss statement aggregates the revenues, expenses, and profits or losses of a business. This report portrays the financial results of a business for a specific period of time, such as for a month, quarter, or year. If it is being reported by a publicly held company, the P&L also includes both basic and diluted earnings per share information. The profit and loss statement is considered by many to be the most crucial of the financial statements, for it reveals the ability of the reporting business to generate a profit. As such, it is used to plan for the revenue enhancements and cost reductions needed to improve profitability. The statement is particularly useful when viewed on a trend line, to see how an organization is faring over time.
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The Interpretation of Financial Statements
Format of a Profit and Loss Statement
The general format of the profit and loss statement, as presented from top to bottom, is noted below. The outcome of a P&L can vary, depending on whether a business is using the cash basis or accrual basis of accounting. These different methods can be impacted by the timing of cash flows entering and departing a business.
Sales
The gross sales line item includes all sales recognized by the business during a reporting period. Following this line is the amount of sales returns and allowances, which are subtractions from the gross sales figure. The result is a net sales figure, which (as the name implies) is the net of gross sales and sales returns and allowances.
Cost of Goods Sold
The cost of goods sold line item includes all direct labor and direct materials costs, as well as factory overhead charges. If the business is a service organization, then this line item will mostly include labor costs.
Selling General and Administrative Expenses
Selling, general and administrative expenses are usually presented as a set of line items, each one addressing a different type of expense related to the selling and administrative activities of the business, such as compensation, rent, and utilities.
Operating Profit
Operating profit is a calculated line item, which is net sales minus the cost of goods sold and the selling, general and administrative expenses. It represents the financial outcome of the business before financing and tax issues.
Interest Income and Expense
This line item contains both the interest income earned and interest expense incurred by the business during the reporting period.
Income Taxes
The income taxes line item contains the amount of income taxes recognized by the business for the reporting period.
Net Profit
Net profit is a calculated line item, which is operating profit, plus or minus the net amount of interest income and expense, minus income taxes.
Presentation of a Profit and Loss Statement
A reporting entity can use a range of options for how it presents its profit and loss statement, depending on what is considered a traditional reporting structure in its industry, and whether certain accounts contain sufficiently large balances to warrant presentation in a separate line item. The following exhibit contains a common presentation format for a profit and loss statement.
Other Financial Statements
The P&L is part of the financial statements, which are also comprised of the balance sheet and the statement of cash flows. At a minimum, one should review the profit and loss statement alongside the balance sheet, to gain a clear view of both the financial results and financial position of a business. When financial statements are issued to outside parties, the package is more likely to include a statement of cash flows.
How to Create a Profit and Loss Statement
The easiest way to create a profit and loss statement is to print it directly from the company's accounting software package. If the books are being kept manually, then it is necessary to first create the trial balance report, then extract the line items from that report pertaining to the income statement, and then aggregate this information into the proper format for the statement.
Terms Similar to Profit and Loss Statement
The profit and loss statement is also known as the P&L, P&L statement, profit statement, or income statement.