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Profit and Loss Statement (P&L) Definition
A financial statement that presents the summary of revenue earned as well as expenditures and costs incurred within a specified period is called the Profit and Loss (P&L) statement. This period could range from a fiscal quarter to a financial year. P&L statement is also known as the income statement, expense statement, statement of financial results, and so on. P&L statements provide the data to predicate the revenue generating potential of a company, it’s operational efficiency, and identifying the profit making verticals as well as lossy investments.
A Little More on What is Profit and Loss Statement
Together with the cash-flow statement and the balance sheet, the P&L statement forms the trifecta of financial statements issued on a quarterly as well as annual basis by every publicly traded company. It shows the magnitude of change in the company accounts over a quarter or a year, like the cash-flow statement. The company’s outstanding payments and debts are presented in the balance sheets. The difference between the P&L and cash-flow statements is the logging of earnings and expenses under the accrual accounting method.
The standard P&L statement follows a set pattern. Revenues are declared in the first row, followed by an account of business expenses accrued over the same duration, including but not limited to, operating expenses, cost of selling goods, taxes, interests, and so on. The bottom line of the P&L statement shows the net income made after subtracting expenses from the total revenue made. This difference is the actual profit earned. Creating a P&L statement is easy, many templates are readily available online to get cracking on one.
While standalone P&L statements are useful to keep a tab on the revenue and investments of a company, reading successive P&L statements over a long duration is where a truer picture of the company’s finances, profits, and value emerges. For instance, a single income statement may give one the idea that a firm’s revenue in a single quarter far exceeds its expenses, despite substantial expenses. Reading the income statement in comparison to the previous quarters gives a better idea of the rate of revenue growth vs. rate of expenditure increase. If the rate of expenditures exceeds revenue growth, the net income gained is substantially lower than can be seen from a single P&L statement.
Other crucial financial insights and statistics that can be drawn from the income statement are calculation of gross profit margins, net profit margins, operating profit margins, and the ratio of these values. When studied together with the cash-flow and balance sheet, the P&L statement provides the black and white picture of a company’s financial performance and value.
References for Profit & Loss Statement
Academic Research on Profit & Loss Statement
Predicting the near term profit and loss statement with an econometric model: A feasibility study, Elliott, J. W., & Uphoff, H. L. (1972). Predicting the near term profit and loss statement with an econometric model: A feasibility study. Journal of accounting research, 259-274. This journal applies the econometric model tools to study the monthly P&L statements of a company.
The Relation Between the Balance Sheet and the Profit–and–Loss Statement, Nelson, E. G. (1942). The Relation Between the Balance Sheet and the Profit-and-Loss Statement. The Accounting Review, 17(2), 132-141. This review provides the correlation between the P&L statement of a publicly traded firm and its balance sheets.
Form, Function, and Interpretation of the Profit and Loss Statement, Johnson, A. W. (1943). Form, Function, and Interpretation of the Profit and Loss Statement. The Accounting Review, 18(4), 340-347. This review does a deep dive on the various crucial financial insights that can be drawn from a P&L Statements’ interpretation.
Defects of the monthly profit and loss statement, Castenholz, W. B. (1926). Defects of the monthly profit and loss statement. Accounting Review, 12-19. This journal takes a critical look at the monthly P&L statements and outlines its limitations and flaws.
Profit and loss statement, GUILDING, C. (2010). Profit and loss statement.
Best Practice for Valuation of a Subdivision Without Profit and Loss Statement: A case study on Andebjo and the acquisition of a subdivision from Company X …, ANDERSSON, F., & BJÖRELIND, F. (2017). Best Practice for Valuation of a Subdivision Without Profit and Loss Statement: A case study on Andebjo and the acquisition of a subdivision from Company X comprising intellectual property, employees and a servicecontract. This thesis provides a literature review and a valuation model, along with expert interviews to suggest best practices in gauging the value of small divisions in mergers and acquisitions in the absence of P&L statements.
How to Read a Profit–And–Loss Statement, Peloubet, L. G. (1927). How to Read a Profit-And-Loss Statement. Journal of Accountancy (pre-1986), 44(000005), 390. This journal sheds light on the ins and out of a P&L statement and how to make sense of one.
William H. Bell:” How to Read a Financial Statement” and” How to Read a Profit and Loss Statement” (Book Review), Stockwell, H. G. (1927). William H. Bell:” How to Read a Financial Statement” and” How to Read a Profit and Loss Statement”(Book Review). The Accounting Review, 2(4), 412. This journal provides readers with the basics of reading a P&L and other financial statements.
Analysis of the profit–and–loss statement, Finney, H. A. (1922). Analysis of the profit-and-loss statement. Journal of Accountancy (pre-1986), 33(000006), 451. This journal takes a deep dive into the proper analysis of a P&L statement.
The Profit and Loss Statement, Donaldson, T. H. (1983). The Profit and Loss Statement. In Understanding Corporate Credit (pp. 43-60). Palgrave Macmillan, London. This chapter sheds light on the significance of a P&L statement in understanding corporate credit.
Integrated Profit and Loss Statement 2014, Passion, S. P. Integrated Profit and Loss Statement 2014. This paper defines, explains, and does a deep dive on an Integrated P&L Statement and its significance.
Bad Debts in the Profit–And–Loss Statement, Leonhardi, W. (1941). Bad Debts in the Profit-And-Loss Statement. The Accounting Review, 16(3), 234-243. This journal sheds light on bad accounting scenarios that mar the authenticity of P&L statements, with focus on the accountability of debt.
Profit and loss statement: fiscal report card., Caplan, C. M. (1986). Profit and loss statement: fiscal report card. CAL [magazine] Certified Akers Laboratories, 49(8), 2-4.