How to Write a Profit and Loss Statement

What Is a Profit and Loss Statement?

A profit and loss statement (P&L) is a financial report that shows a company’s revenues, expenses, and net profit or loss over a set period. It highlights how much money the business made and spent, ultimately revealing its profitability.

Revenue appears at the top, followed by a breakdown of costs, including direct costs like materials and indirect expenses like rent. The final figure, net profit or loss, indicates the business’s financial outcome.

How To Create a Profit and Loss Statement

Select the Timeframe

Determine the period for which the statement will apply. Depending on reporting needs, this could be a month, quarter, or year. For example, a company may create a quarterly statement to track performance against quarterly goals.

Compile Revenue Figures

List all income sources for the chosen timeframe. Revenue includes sales from products or services, interest earned, or other earnings. For instance, a retail store’s revenue might consist of $100,000 in sales and $2,000 from interest on investments, totaling $102,000.

Determine Cost of Goods Sold (COGS)

Identify direct costs tied to producing or acquiring products sold during the period. For a business manufacturing furniture, COGS includes wood, fabric, and labor costs. If direct material costs were $40,000 and labor was $15,000, total COGS would be $55,000.

Calculate Gross Profit

Subtract COGS from total revenue. This figure represents the profit made before accounting for operating expenses:

Gross Profit = Total Revenue – COGS

Using the previous example, gross profit would be: $102,000 (Total Revenue) – $55,000 (COGS) = $47,000 (Gross Profit)

List Operating Expenses

Record expenses required to run the business, such as rent, salaries, utilities, marketing, and insurance. For a small business, this might include $10,000 in rent, $15,000 in salaries, and $5,000 in marketing, totaling $30,000.

Find Operating Profit

Subtract operating expenses from gross profit to determine income generated from regular business operations:

Operating Profit = Gross Profit – Operating Expenses Continuing

Example: $47,000 (Gross Profit) – $30,000 (Operating Expenses) = $17,000 (Operating Profit)

Include Non-Operating Items

Add or subtract any income or expenses unrelated to primary business activities. This could involve interest from investments or losses from asset sales. For instance, if $1,000 is earned from interest and $500 is spent on loan interest, net non-operating income would be $500.

Calculate Net Profit

Adjust operating profit for non-operating items to find net profit:

Net Profit = Operating Profit + Non-Operating Income – Non-Operating Expenses

Example: $17,000 (Operating Profit) + $1,000 (Interest Earned) – $500 (Interest Paid) = $17,500 (Net Profit)

Review for Accuracy

Verify all figures match the financial records and ensure consistency in calculations.

Format for Clarity

Present the statement in an organized layout. Start with total revenue at the top, followed by COGS and gross profit. List operating expenses and calculate operating profit. End with non-operating items and net profit at the bottom. This clear structure helps readers quickly understand the company’s financial standing.

Types of Profit and Loss Statements

 Profit and loss statements (P&L) can be categorized based on their format and specific use cases. Here are the main types:

Single-Step P&L Statement

This format straightforwardly summarizes revenues and expenses. All income sources are listed at the top, followed by total expenses, with the net profit or loss calculated at the bottom. It’s simple and suitable for smaller businesses needing a basic overview.

Multi-Step P&L Statement

This detailed format separates operating and non-operating activities. It includes gross profit, operating expenses, and non-operating income/expenses to give a clearer picture of core business profitability and total net income. Larger businesses often use this to better analyze operational performance.

Comparative P&L Statement

This statement compares financial performance across different periods, such as quarterly or yearly. By placing figures side by side for quick comparison, it helps identify trends, growth, and areas needing improvement.

Pro Forma P&L Statement

Used for projections, this type estimates future income and expenses based on assumptions about market conditions or business activities. Businesses use it for planning, budgeting, and presenting forecasts to investors.

Segmented P&L Statement

This statement breaks down financials by specific segments within a company, such as departments, product lines, or locations. It provides insight into which areas contribute most to overall profitability.

Income Statement vs. Profit and Loss: Are They the Same?

Yes, an income statement and a profit and loss (P&L) statement are the same. Both terms refer to a financial report summarizing a company’s revenues, expenses, and net profit or loss over a specified period.

The document helps assess business performance by showing income generated and costs incurred, leading to the final profit or loss figure. Companies use this statement to evaluate their financial health and make strategic decisions.

How Often Are Profit and Loss Statements Calculated?

Profit and loss statements are typically calculated at regular intervals to monitor and assess financial performance. Common timeframes include:

1. Monthly: Provides a short-term view of financial performance, helping businesses track trends and make immediate adjustments. Small businesses often use monthly statements to manage cash flow and expenses closely.
2. Quarterly: Used by many companies to report financial results to stakeholders and identify performance trends over a longer period. Quarterly statements align with fiscal quarters (e.g., January-March, April-June).
3. Annually: Offers a comprehensive overview of the entire year’s financial performance. Annual P&L statements are crucial for preparing tax returns, annual reports, and strategic planning.
4. Ad Hoc: Sometimes created for specific purposes, such as preparing for a major business decision, applying for a loan, or evaluating the financial impact of a particular event.

The choice of frequency depends on the business’s size, industry, and reporting needs. Monthly and quarterly reports provide frequent insights, while annual statements give a broader view.

How To Read and Analyze a Profit and Loss Statement

Follow these steps:

1. Review Total Revenue
   • Start by looking at the top line, which shows total income from all sources. Compare this figure with previous periods to see growth trends. For example, an increase in total revenue over consecutive quarters signals positive business momentum.
2. Examine Cost of Goods Sold (COGS)
   • Identify direct costs related to producing or purchasing goods. This helps determine the gross margin. High COGS compared to revenue may indicate rising production costs or inefficient processes.
3. Calculate Gross Profit
   • Subtract COGS from total revenue to find gross profit. A higher gross profit indicates the business is making enough revenue to cover direct costs.
   • Use the formula: Gross Profit = Total Revenue – COGS
4. Analyze Gross Margin
   • Divide gross profit by total revenue to find the gross margin percentage. This metric reveals how much profit is made for each dollar of sales. For example, a 60% margin shows that 60 cents of each dollar contribute to covering other expenses.
5. Inspect Operating Expenses
   • Review regular business expenses, such as salaries, rent, and utilities. High operating expenses can reduce overall profit, so compare these with previous periods or industry standards to identify potential cost-saving opportunities.
6. Calculate Operating Profit (EBIT)
   • Subtract operating expenses from gross profit to see earnings before interest and taxes (EBIT).
   • This shows profit from core business activities: Operating Profit = Gross Profit – Operating Expenses
7. Check Non-Operating Items
   • Look at income and expenses unrelated to regular business operations, such as interest income, interest expenses, and gains or losses from asset sales. These items can affect net profit but do not reflect ongoing operational performance.
8. Determine Net Profit (Bottom Line)
   • Review the net profit, which shows the company’s total earnings after all expenses and non-operating items. A positive figure indicates profitability, while a negative one suggests a loss.
   • Net Profit = Operating Profit + Non-Operating Income – Non-Operating Expenses
9. Compare with Past Periods
   • Analyzing P&L statements from different periods helps identify trends and changes. Consistent growth in revenue and net profit indicates a healthy business, while declining figures may require attention.
10. Calculate Key Ratios
    • Net Profit Margin: Divide net profit by total revenue to find the percentage of profit made for each dollar earned. This helps assess overall profitability.
    • Operating Expense Ratio: Divide total operating expenses by total revenue to see what portion of income is used for operations. A lower ratio indicates better cost control.
11. Look for Red Flags
    • Sudden increases in expenses, declining revenue, or a sharp drop in net profit are warning signs. Investigate these areas to identify the cause and address potential issues.

Balance Sheet vs. Profit and Loss Statement

A balance sheet and a profit and loss statement serve different purposes in financial reporting.

Balance Sheet

This statement provides a snapshot of a company’s financial position at a specific time. It shows assets, liabilities, and equity, detailing what the company owns and owes. Assets include cash and inventory, while liabilities cover debts and obligations. Equity represents the owner’s investment and retained earnings.

The balance sheet follows the equation: 

Assets = Liabilities + Equity

Profit and Loss Statement (P&L)

This report shows a company’s financial performance over a specific period, such as a quarter or year. It lists revenue earned and expenses incurred, resulting in the net profit or loss. Unlike the balance sheet, it reflects operational results and insights into profitability over time.

Key Differences between a Balance Sheet and a Profit and Loss Statement (P&L):

• The balance sheet captures a moment, while the P&L covers a time range.
• The balance sheet highlights financial stability, and the P&L focuses on profitability.
• The P&L explains how profit is generated, whereas the balance sheet shows how that profit is managed.