In fact, experts consider a profit and loss statement one of the most common financial documents in any sector and business plan. You may even call it mission-critical.<\/p>\n\n\n\n
In this in-depth guide, we\u2019ll cover the essential elements of profit and loss statements, including:<\/p>\n\n\n\n
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- Profit and loss statements most common types,<\/li>\n\n\n\n
- Examples of profit and loss statements, <\/li>\n\n\n\n
- Profit and loss statement templates, <\/li>\n\n\n\n
- Tested tips for making better P&L statements, and more.<\/li>\n<\/ul>\n\n\n\n
Let\u2019s start with a few general remarks that you need to know first!<\/p>\n\n\n
\n![\"Profit](\"https:\/\/clockify.me\/learn\/wp-content\/uploads\/2023\/07\/Profit-and-Loss-Statement-cover.jpg\")
<\/figure>\n<\/div>\n\n\n<\/div>\n\n\n\nWhat is a profit and loss statement?<\/h2>\n\n\n\n
A profit and loss statement is a financial statement that typically covers the following items:<\/p>\n\n\n\n
- \n
- Revenues, <\/li>\n\n\n\n
- Costs, and <\/li>\n\n\n\n
- Expenses.<\/li>\n<\/ul>\n\n\n\n
Moreover, a profit and loss statement usually consists of company revenues, costs, and expenses within a specific period, like a month, a quarter, a fiscal year \u2014 or even a week.<\/p>\n\n\n\n
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When done properly, a P&L can help protect a company\u2019<\/span>s financial bottom line by providing deeper insights into how a business can reduce costs and increase revenue.<\/p>\n\n\n\n
In other words, a profit and loss statement is a handy tool that lets you scrutinize your company\u2019<\/span>s financial health (or lack thereof).<\/p>\n\n\n\n
Interestingly, a P&L statement goes by many names, depending on the experts you talk to. Here\u2019s a quick list of some of the terms:<\/p>\n\n\n\n
- \n
- Expense statement,<\/li>\n\n\n\n
- Statement of profit and loss,<\/li>\n\n\n\n
- Income statement, etc.<\/li>\n<\/ul>\n\n\n\n
In any case, P&L statements summarize a company\u2019s revenues, expenses, and costs in one form or another and are typically performed by in-house or outsourced accountants. But, if you\u2019re a finance-savvy manager, you can even perform one yourself \u2014 at least the less detailed P&L statements.<\/p>\n\n\n\n
Sidenote: <\/strong>Public companies are required by law to make their P&L statements publicly available \u2014 specifically, on their web page\u2019s investor relations <\/em>section.<\/p>\n\n\n\n
Because of the insight they offer, profit and loss statements allow managers, leaders, and investors to make better investing decisions or spot underperforming business areas.<\/p>\n\n\n\n
To get you on the same page with creating your P&L statements the right way, let\u2019s take a quick look at 2 universal methods for creating profit and loss statements.<\/p>\n\n\n\n
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\n <\/picture>\n <\/div>\n<\/div>\n <\/p>\n\n\n\n2 Universal methods for creating a P&L statement<\/h2>\n\n\n\n
A profit and loss statement comes into existence thanks to 2 types of accounting methods \u2014 either the accrual method or the cash method. In simple terms, these universal accounting methods are tools for tracking and recording expenses in certain ways. <\/p>\n\n\n\n
Still, the method you choose can make all the difference.<\/p>\n\n\n\n
For illustration, investors often inspect corresponding types of P&L statements published by same-sector companies of similar size. After crunching the numbers, they spot trends in managing expenses and decide to invest in one company rather than another. <\/p>\n\n\n\n
For clarity\u2019s sake, suppose a company decides to use the cash method, although using the accrual method would have provided more insight into the company\u2019s financial performance. In this case, the investors may disapprove of the inappropriate use of accounting methods, leading to the investor deciding not to invest in the company.<\/p>\n\n\n\n
To explore further, we\u2019ll next discuss the accrual and cash method in more detail.<\/p>\n\n\n\n
Accounting method #1: Cash method<\/h3>\n\n\n\n
Accountants often call this \u201cthe cash accounting method.\u201d<\/em> Companies use the cash method only when they need to record instances of cash changing hands \u2014 that is, when cash actually enters or leaves the business. <\/p>\n\n\n\n
An example of this would be if a business counts their cash on hand and the money they paid for expenses.<\/p>\n\n\n\n
Accountant Francis Fabrizi<\/a> of Keirstone Limited explained that smaller companies typically prefer the cash method of accounting:<\/p>\n\n\n\n
\n\n![\"Francis](\"https:\/\/clockify.me\/learn\/wp-content\/uploads\/2023\/07\/Francis-Fabrizi.jpg\")
<\/figure>\n<\/div>\n\n\n\n\n\u201cSome small businesses may choose to use the cash method for accounting purposes, as the accrual method can be more complex and time-consuming to use.\u201d<\/em><\/em><\/em><\/p>\n<\/div>\n<\/div>\n\n\n\n
<\/div>\n\n\n\nYet, this approach comes with a major downside, as it accounts for cash only when it is either paid or received. <\/p>\n\n\n\n
Accounting method #2: Accrual method<\/h3>\n\n\n\n
Unlike the cash method, the accrual method records profit only when it\u2019s earned. In a nutshell, this means that a company records expenses or revenue after the service has been provided, regardless of the fact that it hasn\u2019t received the cash for offering the service.<\/p>\n\n\n\n
Simply put, companies typically use the accrual method for funds that they expect to receive at a future date.<\/p>\n\n\n\n
In the subscription age, the accrual method is a much-loved method for recording revenue and sales.<\/p>\n\n\n\n
For example, picture an on-demand streaming service like HBO GO or Netflix. These companies use the accrual method to record revenue on their P&L statements, although they haven\u2019t collected the payment for the service \u2014 but expect to receive it at a given subscription renewal period.<\/p>\n\n\n\n
In fact, the accountant we mentioned previously, Francis Fabrizi, clarified that the accrual-based method is the preferred method for financial accounting:<\/p>\n\n\n\n
\n\n<\/figure>\n<\/div>\n\n\n\n\n\u201cThe reason is that the accrual method provides a more accurate picture of a company’s financial performance. This is because it recognizes revenue and expenses in the period in which they are actually incurred, rather than when cash is exchanged. The accrual method helps to ensure that revenues and expenses are matched in the same accounting period.\u201d<\/em><\/p>\n<\/div>\n<\/div>\n\n\n\n
<\/div>\n\n\n\n\u2014<\/p>\n\n\n\n
As we have seen, the cash and accrual methods of accounting come with their pros and cons. So, choose the one that fits your needs, your company\u2019s reporting, and your client’s requirements.<\/p>\n\n\n\n
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Whichever accounting method you pick, bear in mind that the process of collecting data for your profit and loss statement is best done using accounting software. Take a look at some of the best on the market: <\/p>\n\n\n\n
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- 15 best free accounting software tools<\/a> <\/li>\n<\/ul>\n<\/div><\/div>\n\n\n\n
What is the structure of a profit and loss statement? <\/h2>\n\n\n\n
By now, you might wonder what is in a profit and loss statement<\/em>. To answer your question, the structure of a typical P&L statement looks something like this:<\/p>\n\n\n\n
- \n
- Revenue:<\/strong> the total amount of money that the business has earned during a given accounting period (a week, month, quarter, calendar year, or fiscal year).<\/li>\n\n\n\n
- Cost of goods sold (COGS):<\/strong> the cost of the services or products sold by the company; includes items like materials and direct labor.<\/li>\n\n\n\n
- Gross profit<\/strong>: the difference between revenue and cost of goods sold; also known as gross margin<\/em> and gross income.<\/em><\/li>\n\n\n\n
- Operating expenses:<\/strong> the cost of operating the company, including rent, utilities, payroll, general and administrative costs; includes anything not covered by the cost of goods sold.<\/li>\n\n\n\n
- Operating income: <\/strong>the difference between gross profit and operating expenses; shows how much profit a business makes from its activities prior to deducting interest and taxes.<\/li>\n\n\n\n
- Non-operating items:<\/strong> interest expenses, interest income, gains or losses from selling assets, and other non-operating expenses or non-operating income.<\/li>\n\n\n\n
- Net income, net profit, or bottom line:<\/strong> the profit after the company has deducted all expenses; represents the company\u2019s final figure or overall loss or profit for the corresponding period.<\/li>\n<\/ul>\n\n\n\n
Sure, with all this information in mind, a P&L statement may not infuse you with enthusiasm, but it\u2019s critical that you still prepare it regularly.<\/p>\n\n\n\n
Anyway, don\u2019t worry about it \u2014 we’ll provide you with a few examples and templates that’ll help you craft your own profit and loss statement. But before we get into that, let\u2019s check out a few common types of P&L statements.<\/p>\n\n\n\n
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Explore the difference between gross salary and net salary in our blog post:<\/p>\n\n\n\n
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- Gross pay vs. net pay \u2014 Definition, calculation, key differences<\/a> <\/li>\n<\/ul>\n<\/div><\/div>\n\n\n\n
What are the common types of profit and loss statements?<\/h2>\n\n\n\n
For your convenience, here\u2019s a list of a few types of P&L statements you can use, depending on whether you\u2019re a small, medium, or large company.<\/p>\n\n\n\n
- Cost of goods sold (COGS):<\/strong> the cost of the services or products sold by the company; includes items like materials and direct labor.<\/li>\n\n\n\n
- Revenue:<\/strong> the total amount of money that the business has earned during a given accounting period (a week, month, quarter, calendar year, or fiscal year).<\/li>\n\n\n\n
- 15 best free accounting software tools<\/a> <\/li>\n<\/ul>\n<\/div><\/div>\n\n\n\n
![\"Illustration\"](\"https:\/\/clockify.me\/learn\/wp-content\/themes\/cake-learn\/src\/images\/clockify\/banners\/landing-1@2x.png)
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