What is a P&L (income statement)?

A Profit and Loss Statement (P&L) is one of the cornerstone pieces of a business’ financial reports.

As the name suggests, the P&L determines the profit or loss that a business has made in a given period (usually 1 year). A P&L will typically illustrate two different profit figures, namely Gross Profit and Net Profit (EBIT and EBITDA are also included for larger entities). Gross Profit is the profit (or Loss) earned after only accounting for the expense of Cost of Goods Sold. In other words, this figure aims to demonstrate how much profit the business makes solely from the mark up on its products. A healthy Gross Profit figure is a fundamental part of a viable business. Net Profit (or Loss) is the figure that is used to determine whether or not the business is profitable by deducting all expenses incurred during the year from the total revenue earned. A positive Net Profit figure deems the business profitable. A P&L differs from a Cash Flow Statement in that it accounts for all expenses incurred, not just cash items. Depreciation is an example of a non-cash expense that will reduce an entity’s net profit but will not affect its cash balance. The P&L is important because it illustrates whether or not the business has achieved its main objective: making a profit. Every business needs to stay profitable to survive in the long run. If the P&L concludes the business has been making a loss, decision makers can use this information to review the business and make the necessary changes to return it to profitability. Colour Accounting™ is our financial literacy course.  Click here to secure your place. [traininglist slug=”colour-accounting-normal”]  ]]>