What Is a Profit and Loss Statement (P&L)?
The profit and loss (P&L) statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period, usually a fiscal quarter or year. The P&L statement is synonymous with the income statement. These records provide information about a company’s ability or inability to generate profit by increasing revenue, reducing costs, or both. Some refer to the P&L statement as a statement of profit and loss, income statement, statement of operations, statement of financial results or income, earnings statement or expense statement.
P&L management refers to how a company handles its P&L statement through revenue and cost management.
• The 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 every public company issues quarterly and annually, along with the balance sheet and the cash flow statement.
• It is important to compare P&L statements from different accounting periods, as the changes in revenues, operating costs, R&D spending, and net earnings over time are more meaningful than the numbers themselves.
• Together with the balance sheet and cash flow statement, the P&L statement provides an in-depth look at a company’s financial performance.
There is a very important, but highly technical, concept called revenue recognition. Revenue recognition determines how much revenue you will put on your Bookkeeping statements in a specific time period. For a startup company, revenue recognition is not normally difficult. If you sell something, your revenue is the price at which you sold the item and it is recognized in the period in which the item was sold. If you sell advertising, revenue is the price at which you sold the advertising and it is recognized in the period in which the advertising actually ran on your media property. If you provide a subscription service, your revenue in any period will be the amount of the subscription that was provided in that period.
This leads to another important concept called “accrual Bookkeeping.” When many people start keeping books, they simply record cash received for services rendered as revenue. And they record the bills they pay as expenses. This is called “cash Bookkeeping” and is the way most of us keep our personal books and records. But a business is not supposed to keep books this way. It is supposed to use the concept of accrual Bookkeeping.
Let’s say you hire a contract developer to build your iPhone app. And your deal with him is you’ll pay him $30,000 to deliver it to you. And let’s say it takes him three months to build it. At the end of the three months you pay him the $30,000. In cash Bookkeeping, in month three you would record an expense of $30,000. But in accrual Bookkeeping, each month you’d record an expense of $10,000 and because you aren’t actually paying the developer the cash yet, you charge the $10,000 each month to a balance sheet account called Accrued Expenses. Then when you pay the bill, you don’t touch the P&L, it’s simply a balance sheet entry that reduces Cash and reduces Accrued Expenses by $30,000.
The point of accrual Bookkeeping is to perfectly match the revenues and expenses to the time period in which they actually happen, not when the payments are made or received.
The line items after “Income from Operations” are the additional expenses that aren’t directly related to your core business. They include interest income (from your cash balances), interest expense (from any debt the business has), and taxes owed (federal, state, local, and possibly international). These expenses are important because they are real costs of the business. But I don’t pay as much attention to them because interest income and expense can be changed by making changes to the balance sheet and taxes are generally only paid when a business is profitable. When you deduct the interest and taxes from Income from Operations, you get to the final number on the P&L, called Net Income.
I started this post off by saying that the P&L is “one of the most important things in business.” I am serious about that. Every business needs to look at its P&L regularly and I am a big fan of sharing the P&L with the entire company. It is a simple snapshot of the health of a business.