# Profit and Loss Statement: Meaning, Importance, Types, and Examples

![Profit and Loss (P&L) Statement](https://www.investopedia.com/thmb/xRGdr5CJxzzkLABT7Dxd167oKtE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/plstatement-5f8980ff2b264ff4a874daa9a3c06ec5.png)

*— Dennis Madamba / Investopedia*

> **Definition**
>
> The profit and loss statement is a snapshot of a company's profitability, usually for a quarter or fiscal year.

## What Is a Profit and Loss Statement?

A profit and loss (P&L) statement, also known as an income statement, is a financial statement that summarizes a company's revenues, costs, expenses, and profits/losses for a specified period.

It provides information about a company’s ability to generate revenues, manage costs, and make profits.

### Key Takeaways

*   The P&L statement is a financial statement that every public company issues quarterly and annually, along with the balance sheet and the cash flow statement.
*   When used together, the P&L statement, balance sheet, and cash flow statement provide an in-depth look at a company’s overall financial performance.
*   Statements are prepared using the cash method or accrual method of accounting.
*   It is important to compare P&L statements from different accounting periods, as any changes over time become more meaningful than the numbers themselves.  
    

## How P&L Statements Work

The P&L statement is [one of three financial statements](https://www.investopedia.com/ask/answers/121514/what-difference-between-pl-statement-and-balance-sheet.asp) that every public company issues on a quarterly and annual basis, along with the [balance sheet](https://www.investopedia.com/terms/b/balancesheet.asp) and the [cash flow statement](https://www.investopedia.com/terms/c/cashflowstatement.asp).

It is often the most popular and common financial statement in a business plan, as it shows how much profit or loss a business generated.

A P&L statement is also called:

*   Statement of profit and loss  
    
*   Statement of operations
*   Statement of financial results or income
*   Earnings statement
*   Expense statement
*   Income statement

The P&L statement, like the cash flow statement, shows changes in accounts over a set period of time.

The balance sheet, on the other hand, shows what the company owns and owes at a particular moment in time.

It is important to compare the income statement with the cash flow statement since, under the [accrual method of accounting](https://www.investopedia.com/terms/a/accrualaccounting.asp), a company can log revenues and expenses before cash changes hands.

The P&L statement follows the general format shown in the example below (see "Example of a P&L Statement."). 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.

> **Fast Fact**
>
> P&L management refers to how a company handles its P&L statement through revenue and cost management.

![What Is a P&L Statement?](https://www.investopedia.com/thmb/McvkBT5Q9p0YL97yZqkJZK-itSM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/plstatement_finalJPEG-5c89842bc9e77c0001423049.jpg)

*— Grace Kim / Investopedia*

## Comparing P&L Statements

### Within a Company

It 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. It's important to know this so that a company can address it, as needed.

### Of Different Companies

Comparing one company’s P&L statement with another in the same industry that is similar in size can also help investors evaluate the financial well-being of a company.

For example, such a comparison might reveal that one company is more efficient at managing expenses and has better growth potential than the other.  

> **Important**
>
> Revenues and expenses for nonprofit organizations are generally tracked in the statement of activities. This report is sometimes called a statement of financial activities or a statement of support.

## Types of P&L Statements

As noted above, a P&L statement may be prepared in one of two ways. These are [the cash method and the accrual method](https://www.investopedia.com/ask/answers/09/accrual-accounting.asp).

### Cash Method

The [cash method](https://www.investopedia.com/terms/c/cashaccounting.asp), which is also called the cash accounting method, 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.

### Accrual Method

The accrual accounting method records revenue as it is earned. 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.

> **Tip**
>
> You can find many templates to create a personal or business P&L statement online for free.

## Example of a P&L Statement

Below is the 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 P&L statement to calculate several metrics, including the [gross profit margin](https://www.investopedia.com/terms/g/gross_profit_margin.asp), the [operating profit margin](https://www.investopedia.com/terms/o/operatingmargin.asp), the [net profit margin](https://www.investopedia.com/terms/n/net_margin.asp), and the [operating ratio](https://www.investopedia.com/terms/o/operatingratio.asp).

The P&L, balance sheet, and the cash flow statement together offer an in-depth look at a company’s financial performance.

## Why Are Profit and Loss Statements Important?

The P&L statement shows a company’s revenues and expenditures over a specific period of time, such as a fiscal year. It's important because investors and analysts can use this information to assess the profitability of the company, often combining its data with insights from the balance sheet and cash flow statement. For instance, an investor might calculate a company’s [return on equity (ROE)](https://www.investopedia.com/terms/r/returnonequity.asp) by comparing its net income (as shown on the P&L) to its level of shareholder equity (as shown on the balance sheet).

## What Is the Difference Between a P&L Statement and a Balance Sheet?

A company’s P&L statement shows its income, expenditures, and profitability for a period of time. The balance sheet, on the other hand, provides a snapshot of its assets and liabilities on a certain date (typically the last day of the company’s fiscal year). Investors use the balance sheet to understand the financial strength of the company, comparing the amount and quality of its assets against its liabilities.

## Are All Companies Required to Prepare P&L Statements?

Publicly traded companies are required to prepare a P&L and must file their financial statements with the U.S. Securities and Exchange Commission (SEC) so that they can be made public and scrutinized by investors, analysts, and regulators. Companies must comply with a set of rules and guidelines known as [generally accepted accounting principles (GAAP)](https://www.investopedia.com/terms/g/gaap.asp) when they prepare these statements.

Private companies, on the other hand, are not necessarily required to comply with GAAP or make their financial information public. Some smaller companies may not even prepare formal financial statements at all.

## The Bottom Line

A P&L statement summarizes the revenues, costs, and expenses of a company for a specific period of time.

Investors and analysts use it and other financial statements to assess the financial health of a company and its growth potential.