Definition of a Profit & Loss Statement
A profit and loss, or P&L, statement displays a corporation's revenues and expense items during a time period such as a year, quarter or month. An organization's senior management evaluates a corporate P&L statement to appraise the firm's profitability in the short term and long term.
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Definition
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A profit and loss statement is an accounting summary that indicates an organization's sales as well as operating expenses or losses during a time period. A corporate accountant subtracts expenses from revenues to compute the period's net income. To illustrate, a large department store's revenues during a quarter amount to $100 million. Its general and administrative expenses total $75 million. The company's P&L statement for the quarter shows both revenue and expense amounts, and it indicates a $25 million net income.
Significance
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Profit and loss analysis is pivotal for top leadership because it helps them evaluate a company's profit potential over the short term and the long term. For instance, senior managers may compare current versus historical sales data to gauge increases or decreases in sales. An organization's business partner also may appraise its P&L statement to ensure the firm generates sufficient funds from sales to reimburse loans and stay in business.
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Revenues
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A company's revenue represents income brought in during a period and may include sales, interest income, commissions and other investment fees. Generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS) require a firm to record sales when customers receive goods. For instance, a manufacturing company ships goods worth $1 million to a customer. A corporate accountant debits the accounts receivable account for $1 million, and she credits the sales revenue account for the same amount.
Expenses
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A company's expense items reflect costs incurred during a period and may include cost of goods sold, interest expense and fees paid. GAAP and IFRS require a company to record expenses when it receives goods from a supplier or services from a vendor. As an illustration, the manufacturing company receives goods worth $2.5 million from a major supplier. A corporate accounting manager credits the accounts payable account for $2.5 million, and he debits the cost of goods sold account for the same amount.
Profitability Analysis
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A corporate financial analyst reviews income statement, or P&L, data to assess a firm's profitability. He may calculate the firm's profit margin or gross margin. Profit margin equals net income over revenue. Gross margin equals revenue minus cost of goods sold divided by revenue, and measures corporate profits before accounting for general and administrative expenses.
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