What is a profit and loss statement used for?

A profit and loss statement indicates whether your business is profitable and sustainable. This document shows a profit if your business has more revenue than expenses. If your cash outflow exceeds your inflow, it will show a net loss.

A P and L statement can help you answer questions about your overall business strategy, day-to-day operations and company trends.

Overall business strategy:

• Does your revenue cover your costs and expenses?
• Can you pay yourself, the owner, with the proceeds?
• What’s the ROI for your business expenses?

Day-to-day operations:

• Top- and low-earning revenue streams
• Topspending categories
• Gross margin or ratio of costs of goods sold (COGS) to revenue
• Where you can lower spending

Company trends:

• Your business’s financial progress over a specific time period
• Factorsimpactingprofitability and revenue growth
• Your company’s salespatterns compared to industry trends

This simple report carries enormous weight for business owners. It’s one of the three main accounting documents used by businesses, along with a balance sheet and cash flow statement.

What’sincluded in aprofit and loss statement?

Typically, a profit and loss statement includes five main sections: income or revenue, COGS, general expenses, other income or expenses and net income.

1. Income/revenue:Total amount received from sales of goods or services.
2. COGS:Cost of materials and time involved in making aproduct or service.
3. General expenses:Business overhead costs that aren’t factored in the COGS, including payroll, utilities, hardware, software and travel.
4. Other income or expenses:Irregular transactions not associated with daily operations.
5. Net income:The “bottom line” on yourP and L statement that shows your profit or loss.

Here’san example of a simple P and L statement:

Income or revenue

Each income or expense categoryhas its own line to show you the total earned or spent. If you use subcategories, your profit and loss statement will include a subtotal of the subcategories as in this example:

Cost of goods sold

Here’s a sample section outlining COGS:

Net income

Your Net Income makes upthefinal sectionof aprofit and loss statement.It’scalculated like this:

Net Income = (Income – COGS – Expenses – Other Expenses) + Other Income

This sampleportionof a P and L statement shows how you arrive at net income:

A positive net income means you’ve earned more than you spent—you have a profit! If your net income is negative, it shows that you’ve spent more than you earned, and your business has incurred a loss.

What else is there to know aboutprofit and loss statements?

In addition to the “total” lines of the five major sections discussed, you’ll see a few other “total lines” on a typical profit and loss statement.

Grossprofit

The Gross Profit total line comes right after the COGS section. This figure tells you how much you actually earned after subtracting the costs of selling your product or service from your revenue. The gross profit is what you have left to apply toward your operating expenses to keep your business running.

GrossProfit= Revenue – Cost of Goods Sold

Bear in mind that showing a profit isn’t the same as having available cash. You can show a profit yet have a negative cash flow. This can happen if you need to take owner distributions or have sizeable liability payments.

Net operating income

The Net Operating Income line goes under the General Expenses section of your P and L statement. This figure represents your net income after subtracting operating expenses and costs from your revenue. It doesn’t include irregular income or expenses. This is the money you have or don’t have left after day-to-day expenses.

Net Operating Income = Income – COGS – Expenses

Other incomeand expenses

The Other Income and Other Expenses lines highlight uncommon income and expenditures. These lines let you see and discount infrequent transactions. This way, you can easily budget around these amounts.

• Other income: Can include income from dividends, investments, earned interest and one-time income from unusual sources.
• Other expenses: Can include taxes or penalties, one-time costs such as legal fees, depreciation and reimbursable expenses.

Putting all the sections together, your P and L statement might look like this:

How to create a profit and loss statement

A variety of digital bookkeeping programs make it easy to prepare a profit and loss statement. You can also create your own P and L statement by following these steps:

1. Add lines for your income, costs,expensesand other income/expenses.
2. Add upthe categories in each section.
3. Subtract yourcosts,expensesand other income/expenses from your revenue.
4. At the bottom, make a line for Net Income.

Simple Profit & Loss Template for PDF & Word

Use this simple profit and loss template to track your business’ revenue and expenses.

*Indeed provides these examples as a courtesy to users of this site. Please note that we are not your HR or legal adviser, and none of these documents reflect current labor or employment regulations.