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What is a profit and loss statement?
A profit and loss statement is a record of revenue and expenses incurred by a business in a given period of time. A profit and loss statement is also called a P&L, an income statement, a statement of profit and loss, an income and expense statement, or a statement of financial results. The P&L shows management and investors whether a company made a profit or lost money in the time period covered by the report.
A profit and loss statement shows how a business turns revenue into profits, helping managers gauge the ebb and flow of earnings and expenditures. Creditors and investors consult a P&L to determine the level of risk involved in joining a venture or extending capital to a business. The statement also registers gains and losses to be taxed or credited for Internal Revenue Service (IRS) purposes.
Public companies are required to produce three foundational financial statements quarterly and annually for public disclosure: a profit and loss statement, a balance sheet, and a cash flow statement. Private companies create profit and loss statements on a regular basis for internal management purposes and for their investors.
There are two accounting methods for building a profit and loss statement. Under the simple single-step method, a business totals revenues and subtracts expenses to get the bottom line. With the more complicated multi-step approach, you begin by deducting operating expenses from revenue, which yields operating income. Operating income is added to the net of non-operating revenues, non-operating expenses, and investment gains or losses, leaving you with pre-tax income. After deducting income taxes, you have net income.
Profit and loss statement example
The table below represents a very simple profit and loss statement:
The statement was constructed via the multi-step approach, where sales, give way to gross profit, operating profit, and net income.