Profit and Loss

What is a Profit and Loss Account? 

A Profit and Loss statement or account is popularly referred to as a P&L statement, Statement of Earnings, or Statement of Operations. It provides detailed insight on the revenue of a company for a given time period, tax and depreciation, earning per share number, and expenses incurred to generate the revenue.

A P&L statement is generally produced monthly and is primarily a summary of the income and expenses of a business. It will indicate whether a business made or lost money for the month under review. The statement usually comprises five main components:  Cost of goods sold, Revenue, Gross profit, Net profit, and Expenses. 

Gross profit is an indicator of efficiency. The higher is the gross profit margin, the better it is as it indicates that the business keeps more from each rupee of sales. If the gross profit margin is decreasing, then the business needs to determine the cause and take necessary measures to decrease the decline.  

The net profit margin indicates how much profit a business is making from every rupee spent. A decline in the net profit margin indicates that you are paying more in expenses. Profitable businesses generally spend less of their income on expenses. 

Key Highlights:

  • A Profit & Loss statement indicates the extent to which a company has been successful in achieving its objectives
  • A Profit Loss statement also indicates the revenues made by a business and the costs involved in generating the revenue. It clearly indicates any places where the company can improve or whether the company has been consistent in its earnings.  
  • A P&L statement is usually generated at the end of accounting periods and allows businesses to stay on top of their financial situation and make necessary adjustments for the upcoming review period. 

Profit and Loss Statement analysis:

The P&L statement is one of the three financial statements issued by every public company annually and quarterly along with the cash flow statement and balance sheet. It is a common financial statement included in a business plan and indicates how much loss or profit was generated by a business.  

The statement indicates changes in the account over a specific period. It is crucial to perform a comparison of the income statement with the cash flow statement. A business can log in revenues and expenses under the accrual method of accounting before the cash changes hands.  

The income statement or P&L statement follows a general format. It begins with the entry of revenue, includes the cost of goods sold, tax expenses, operating expenses, and interest expenses. The bottom line comprises net income referred to as earnings or profit. It is crucial to compare income statements from different accounting periods as changes in operating costs, revenues, net earnings, research, and development spending.    

There is no standard format for the P&L account or statement. However, the statement needs to include these items. 

  • Returns
  • Revenue 
  • Net Revenue
  • Gross Profit
  • Cost of Goods Sold 
  • Promotion & advertising 
  • Amortisation & depreciation 
  • Salaries
  • Rent and office expenses 
  • Interest expense 
  • Income taxes
  • Net earnings

There are numerous kinds of profit and loss account formats.  Here are some commonly used P&L formats by companies.

  • Single-step income statement:

This is one of the simplest forms of P&L statement and is utilized commonly by small businesses. This P&L statement records fewer line items and has subtotals only for expenses and revenue.   

  • Multi-Step Income Statement:

This income statement variant can be considered to be an improvised version of the Single-step income statement. It presents subtotals for operating income and gross profit thereby making it easier for analysis and comprehension.    

  • Comparative Income statement:

This kind of income statement records the performance of the company for multiple periods in adjacent columns. This format is preferred by financial analysts and it features routinely in annual and quarterly reports. 

  • Common size analysis income statement:

This P&L statement represents various line items such as sales and other important metrics. This kind of income statement is essential for benchmarking a company’s performance against its competitors. 

  • Variance P&L statement:

This profit & loss statement highlights performance against a specific benchmark. It could be a budget or a plan or could also be a specific period of performance.

Company profit and loss statement example:

Here is a sample of the annual profit loss statement for an electronics goods store, XYZ Inc. It makes it easier to perform P&L analysis using this detailed account statement of profit and loss of the company. Profit and loss calculation is not the same for each company as the income sources and the expenditure are not the same for each business.

Product Sales₹26,43,000
Other Sources of income₹9,85,000
Total Income₹36,28,000
Banking Charges₹4,500
Showroom expenses₹4,72,000
Travel, Meals & other expenses₹1,27,000
Total Expenses₹12,01,540
NET Income₹24,26,460

Preparing a P&L report:

Preparing a detailed profit and loss report requires certain detailed information for business analysis and for tax preparation. The first step is to list the business net income for each quarter of the year. The section can be broken into sub-sections for showing income from various sources. You need to then itemize the business expenses for each quarter. It is essential to highlight the difference between Sales and Expenses as Earnings. Taxes need to be listed under the Expenses category. You need to report net income at the bottom after subtracting the overall expenses. You can include any other financial expenditure you have incurred under the category. 

Wrapping Up:

The concept of profit and loss is crucial for any business. It is from a P&L statement it is possible to deduce the profit or loss a company has made in the financial year or quarter under consideration. Maintaining a record of the P&L account is essential for all businesses. This financial report conveys how profitable your business has been over a given period. It lists your revenue, losses, and expenses. It is one of the most crucial financial statements for businesses along with cash flow statements and balance sheets.

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