A profit and loss (P&L) statement is the same as an income statement. It’s a financial document that includes the revenues and expenses of a company. Business owners use the P&L to assess the company's profitability—how much money a company makes.
Knowing how to read a profit and loss statement is key to making informed business decisions. It shows you where you might be able to cut costs. This article will cover what a P&L is, why it's important, and how business owners should analyze it.
Profit and loss (P&L) statement definition
A profit and loss statement is a snapshot of a company's sales and expenses over a period of time, such as one year. It shows company revenues, expenses, and net income over that period. The bottom line on a P&L will be net income, also known as profit or loss. The profit and loss formula is:
Revenue - expenses = profit or loss
Types of profit and loss statements
The profit and loss statements show how well a business is performing and how profitable it is. There are two types of P&L statements—the single-step and the multistep method. Each method has pros and cons, and the choice depends on the nature and complexity of the business.
The single-step method is simple, straightforward, and involves only one calculation. This method subtracts all expenses from revenues to get net income.
An important distinction is that the single-step P&L doesn't separate revenues and expenses into different categories.