Profit and Loss Statement (P&L)

A profit and loss (P&L) statement, also called an income statement, summarizes a company’s revenues, costs, expenses, and profit or loss for a specific period (e.g., a quarter or fiscal year). It shows how effectively a business generates revenue and controls costs, and—along with the balance sheet and cash flow statement—provides a comprehensive view of financial performance.

Key takeaways

• The P&L reports revenues and expenses over a period and ends with net income (the “bottom line”).
• It complements the balance sheet (a point-in-time snapshot) and the cash flow statement (cash movements).
• P&Ls can be prepared using the cash method or the accrual method.
• Comparing P&Ls across periods or against peers reveals trends and operational efficiency.

How a P&L statement works

A P&L begins with revenue (the “top line”), subtracts the costs of doing business, and results in net income. Under accrual accounting, revenue and expenses are recorded when earned or incurred, not necessarily when cash changes hands—so it’s important to review the cash flow statement as well.

Common alternate names:
* Income statement
* Statement of operations
* Earnings statement

Main components

• Revenue (Sales): Total income from goods or services.
• Cost of Goods Sold (COGS): Direct costs to produce goods or deliver services.
• Gross Profit: Revenue − COGS.
• Operating Expenses: Selling, general & administrative (SG&A), R&D, depreciation.
• Operating Income (EBIT): Gross profit − operating expenses.
• Non-operating Items: Interest expense/income, other gains or losses.
• Taxes: Income taxes owed for the period.
• Net Income: Final profit or loss after all items (the “bottom line”).

Types of P&L accounting

• Cash method: Records revenue and expenses only when cash is received or paid. Simpler, often used by small businesses and individuals.
• Accrual method: Records revenue when earned and expenses when incurred, regardless of cash flow. Required under GAAP for many companies and provides a more accurate view of ongoing performance.

Comparing P&L statements

• Within a company: Compare consecutive periods to detect trends—growth in revenue vs. growth in expenses, margin compression, unusual one-time items, or changing cost structure.
• Between companies: Compare firms of similar size in the same industry to assess relative efficiency, margin strength, and growth prospects.
• Nonprofits: Revenues and expenses are generally reported in a statement of activities rather than a traditional P&L.

Common metrics and how to use them

P&L figures are used to calculate profitability and efficiency ratios, for example:
* Gross profit margin = Gross profit / Revenue
* Operating margin = Operating income / Revenue
* Net profit margin = Net income / Revenue
* Return on equity (ROE) = Net income / Shareholders’ equity (links P&L to balance sheet)

These metrics help investors and managers evaluate profitability, cost control, and returns.

Reporting and requirements

• Public companies must prepare and file P&L statements (as part of financial statements) in accordance with GAAP or applicable standards.
• Private companies may not be required to follow GAAP or publicly disclose P&Ls, though many still prepare them for management and lenders.

Practical tips

• Review P&L trends over multiple periods rather than relying on a single snapshot.
• Compare revenue growth rates to expense growth rates to spot margin pressures.
• Use the P&L together with the balance sheet and cash flow statement for a complete financial picture.
• Templates for preparing personal or business P&Ls are widely available online.

Bottom line

The P&L statement is a fundamental financial report that summarizes how revenue is converted into net income. Regular analysis—comparing periods and peers, and linking results to cash flows and the balance sheet—reveals a company’s profitability, efficiency, and financial trends.