Definition
A profit and loss statement (P&L), also called an income statement, is a financial report that summarises a business’s revenues, costs, and expenses over a specific period, typically a month, quarter, or financial year. The bottom line of the statement shows whether the business made a profit or incurred a loss during that period.
Structure of a Profit and Loss Statement
The P&L follows a structured format. It starts with total revenue (all income earned from sales and services), then deducts the cost of goods sold (COGS) to arrive at gross profit. From gross profit, operating expenses such as rent, salaries, marketing costs, and utilities are subtracted to produce operating profit (also called EBIT). Interest charges and tax deductions then lead to the net profit or net loss figure.
Key Profit and Loss Ratios
Gross profit margin and net profit margin are two ratios derived directly from the P&L. Gross margin measures how much of each dollar of revenue remains after covering the direct cost of production or purchase. Net margin measures how much remains after all expenses are paid. A business with high revenue but thin net margins may be generating significant sales without translating them into sustainable returns.
Using the P&L for Decision-Making
For decision-making purposes, the P&L is one of the most frequently consulted financial documents. Business owners use it to identify expense categories growing faster than revenue, compare performance against the same period last year, and assess which products or services are contributing most to profitability.
Lenders and investors also scrutinise the P&L closely. A consistent record of profitability, or a credible trajectory toward it, is often a prerequisite for obtaining business finance.
P&L vs Cash Flow Statement
The P&L is prepared on an accrual basis in most formal reporting, meaning revenue and expenses are recorded when earned or incurred rather than when cash moves. This can produce results that look quite different from the cash position, which is why the P&L should always be read alongside the cash flow statement.