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

A profit and loss (P&L) statement is a summary of an organization's income and expenses over a period of time, allowing you to understand what drives profitability.

These financial statements generally cover a year or a quarter, and reviewing them over time helps business owners and investors assess the financial health of a company.

To help you familiarize yourself with income statements, we'll review how they work, why these reports are valuable, and what a basic income statement looks like.

Definition and examples of a profit and loss account

An income statement, also known as an "income statement," is a financial statement that details income and expenses for a specific period.

This report helps you understand what is behind a company's profitability by ranking revenue and expenses. For example, you can see if a business spends more than it earns on production, and you can view operating profit separately from financing costs and taxes.

How a profit and loss statement works

As you step through income and expenses, the story behind the profitability (or loss) unfolds. The income statement begins with income and continues with expenses that eventually result in profit or loss for the organization.

Some profit and loss statements include earnings per share (EPS) of a company.

If parts or materials are needed, these costs are typically less than cost of goods sold (CPV). The result is the gross profit.

The statement then subtracts all the expenses necessary to run the business, such as payroll, utilities, maintenance costs, and other expenses. The result is an operating profit.

At this stage, you can find out how effective the business is in providing goods or services for profit.

In addition to understanding the ability to trade profitably, it is crucial to know what the bottom line is after all taxes and interest.

If an organization borrows money, excessive interest costs can eliminate any benefits. By considering interest expenses, you can assess whether companies are using debt wisely. In addition, taxes are a reality for many companies, so it is necessary to know how much profit is left after paying taxes, after paying all the necessary costs.

After subtracting everything, including input costs, operating expenses, financing costs, and taxes, you get a net income.

Analysis of profit and loss accounts over time

A profit and loss statement is a snapshot of financial results for a period. But this information may not be helpful unless you understand the big picture.

By reviewing how the income statement changes over time, you can identify trends. For example, if COGS increase dramatically, this could indicate lower profitability in the future (or simply a temporary increase in input prices). Therefore, it is essential to view each profit and loss statement as a piece of the puzzle.

Other financial statements

A profit and loss statement provides valuable information on income and expenses. But to have a complete view of the financial health of an organization, it is advisable to review other financial statements as well.

In any financial statement, it is critical to analyze how these reports change over time. It can also be helpful to compare statements from competitors and others in similar industries.

Balance sheet

A balance sheet shows the assets, liabilities and equity of a company. Assets, which appear on the left side of the balance sheet, are things that the business can sell or use to generate income.

Liabilities, on the right hand side, represent payments or obligations that can reduce earnings. Finally, equity is the value of the company if it satisfies the liabilities and has remaining assets.

Cash flow statement

Cash flow statements detail changes in cash levels. Since liquidity is important to keeping businesses afloat, the ability to manage cash is critical.

It's easy to confuse the cash flow statement with the income statement. But the income statement details the financial concept of earnings, which may not affect cash flow as expected.

For example, depreciation may be an "expense" on the income statement, but it is an accounting concept, not a cash flow. The cash flow statement focuses on actual payments and receipts.

We hope you enjoy watching this video about What Is a Profit and Loss (P&L) Statement

Source: Accounting Stuff

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