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Accounting Basics: What Is A Profit and Loss Statement?

A profit and loss statement (P&L) is a financial report that shows the revenues, costs, and expenses incurred by a business over a specific period. It is also known as an income statement, statement of operations, or statement of earnings. The primary purpose of a P&L statement is to help businesses track their financial performance and assess their profitability. The profit and loss statement is usually the first place to look for the financial health of a company.


The P&L statement consists of two primary sections: revenues and expenses. The revenue section shows the income generated by the business during the reporting period, while the expense section shows the costs and expenses incurred in generating that income.


Revenue Section:

The revenue section of the P&L statement includes all of the income generated by the business during the reporting period. This can include sales revenue, service revenue, and any other income streams that the business has. The total revenue is the sum of all of these income streams.


Expenses Section:

The expenses section of the P&L statement includes all of the costs and expenses incurred by the business during the reporting period. These costs can include the cost of goods sold, employee salaries, rent, utilities, and other expenses. The total expenses are the sum of all of these costs.


Net Income:

To determine the net income, the total expenses are subtracted from the total revenue. If the revenue is greater than the expenses, then the business has generated a profit. If the expenses are greater than the revenue, then the business has incurred a loss.



Sample profit and loss statement
Sample P/L

Benefits of a P&L Statement:

There are several benefits of having a P&L statement. Firstly, it helps businesses track their financial performance and assess their profitability. It allows businesses to identify areas where they are spending too much money and make adjustments to reduce costs. It also helps businesses make informed decisions about investments and growth opportunities.


Secondly, a P&L statement is useful for investors and lenders. It provides them with a clear picture of a company's financial health and can help them determine whether or not to invest in or lend money to a business.


In conclusion, a profit and loss statement is an essential financial report that every business should have. It provides valuable insights into a company's financial performance and helps businesses make informed decisions about their finances. By regularly tracking and analyzing their P&L statements, businesses can improve their profitability and achieve their financial goals.


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