A Profit & Loss (P&L) Statement is also known as an Income Statement. It shows you how much money came in and went out in a certain period of time. Comparing those numbers shows you what your net income is, hence the term Income Statement or Profit & Loss (P&L) Statement. It is a key financial statement entrepreneurs need to review on a regular basis.
Think of profit (net income) as your top line minus your costs.
Profit or Net Income = (Revenue + Gains) – (Expenses + Losses)
Another way to look at it is:
Revenue (top line)
Cost of doing business (cost of goods, expenses, taxes)
Profit or Net Income (bottom line)
On your Profit & Loss (P&L) Statement you will review revenue, expenses, and profit.
What makes up revenue?
Revenue is made up of three types of gains.
- Operating Revenue – Revenue or income from primary business activities such as the sale of products or services.
- Non-operating Revenue – Revenue or income from sources outside of primary business activities like bank interest, rent for properties, etc.
- Gains – Gains are other income from one-time activities like the sale of assets.
What makes up expenses?
- Costs of Goods Sold (COGS) This is the expense or the cost of items you need to make your products
- Selling, General and Administrative (SG&A) These are the expenses for running your business-like rent, wages, insurance, etc.
- Depreciation and Amortization Depreciation is the allocation of the cost of an asset over its useful life. Amortization is the accounting method used to reduce cost of a loan or an asset over a set period of time.
- Research and Development (R&D) Like the name says, these are expenses for researching and developing products.
- Secondary Activity Expenses These are all expenses linked to non-core business activities, like interest paid on loans.
- Losses as Expenses Finally, all expenses that go towards a loss-making sale of long-term assets, one-time or any other unusual costs, or expenses towards lawsuits.
What makes up profit?
Profit is simply taking revenue less expenses. If you have a positive number, you are making a profit and if it is a negative number, you are losing money during the covered period of your Profit & Loss (P&L) Statement.
It is possible to have some months where you make a profit and other months where you lose money. This is where understanding your Balance Statement and Cash Flow Statements is critical for the financial health of your business.
There are many sample Profit & Loss Statements available on the internet and all accounting software will create these statements for you.