What is a Profit and Loss (P&L) Statement?

A profit and loss statement, also called an income statement, is a financial document that shows managers, investors, and other interested parties the financial state of a business. The statement can cover any period of time, from one day to ten years, but they are most frequently issued every quarter and every fiscal year. Potential investors use these documents to gauge the financial health of a potential investment, and current investors can see what kind of return they are getting on their shares.

A quick reference charting income versus expenses for the period of time it covers, a profit and loss statement usually ends with a financial amount called a net income, or bottom line. By detailing the net revenue, or total amount of money taken in by a business for goods and services, and contrasting it with net expenses, such as payroll, acquisitions, and so forth, the statement shows examiners how much money the company is making and how it is being utilized. For individuals with large amounts of money invested in the company, they are a vital tool.

By surveying profit and loss statements, examiners can see where the company may be headed financially. A history of statements can be used to predict trends, examine overall performance in the past, and assess how risky investment may be. Assuming that the company is not using creative accounting practices, the document should serve as an accurate representation of the company.

A very basic profit and loss statement lists net revenue at the top, along with primary sources: sale of goods, interest returns on investments, and rent revenues, for example. The sum of these sources of income can be contrasted with the expenses, detailed underneath. Balancing the two categories leaves a net income, listed at the bottom, and it is also often broken down into income per share, as well. Most companies release more detailed profit and loss statements, breaking down income and expenses further to show examiners which categories may be unusual, for example, a high expense due to the acquisition of another company. This type of statement allows companies more fully to explain unusual expenditures and other factors that may affect the income statement.