how profit and loss p l statements work
the p l statement is one of three financial statements that every public company issues on a quarterly and annual basis along with the balance sheet and the cash flow statement it is often the most popular and common financial statement in a business plan as it shows how much profit or loss was generated by a business p l statements are also referred to as a n the p l or income statement like the cash flow statement shows changes in accounts over a set period of time the balance sheet on the other hand is a snapshot showing what the company owns and owes at a single moment it is important to compare the income statement with the cash flow statement since under the accrual method of accounting a company can log revenues and expenses before cash changes hands this document follows a general form as seen in the example below it begins with an entry for revenue known as the top line and subtracts the costs of doing business including the cost of goods sold operating expenses tax expenses and interest expenses the difference known as the bottom line is net income also referred to as profit or earnings p l management refers to how a company handles its p l statement through revenue and cost management grace kim investopediacomparing p l statementsit is important to compare income statements from different accounting periods the reason behind this is that any changes in revenues operating costs research and development r d spending and net earnings over time are more meaningful than the numbers themselves for example a company s revenues may grow on a steady basis but its expenses might grow at a much faster rate comparing one company s p l statement with another in the same industry that is similar in size can further help investors evaluate the financial well being of a company for example doing so might reveal that one company is more efficient at managing expenses and has better growth potential than the other revenues and expenses for nonprofit organizations are generally tracked in a financial report called the statement of activities as such this report is sometimes called a statement of financial activities or a statement of support types of p l statementsas noted above a p l statement may be prepared in one of two ways these are the cash method and the accrual method the cash method which is also called the cash accounting method is only used when cash goes in and out of the business this is a very simple method that only accounts for cash received or paid a business records transactions as revenue whenever cash is received and as liabilities whenever cash is used to pay any bills or liabilities this method is commonly used by smaller companies as well as people who want to manage their personal finances the accrual accounting method records revenue as it is earned this means that a company using the accrual method accounts for money that it expects to receive in the future for instance a company that delivers a product or service to its customer records the revenue on its p l statement even though it hasn t yet received payment similarly liabilities are accounted for even when the company hasn t yet paid for any expenses you can find many templates to create a personal or business p l statement online for free example of a p l statementbelow is the income or p l statement for 2023 and 2022 for the hypothetical company butterfly industries all of the figures are in u s dollar usd millions except per share data you can use the income statement to calculate several metrics including the gross profit margin the operating profit margin the net profit margin and the operating ratio together with the balance sheet and the cash flow statement the income statement provides an in depth look at a company s financial performance 