A profit and loss statement (or income statement) lists the income and expenses of a business. The P&L statement shows financial results over a specified period of time, which could be a month, a quarter (three months), half a year, or a year. The income minus the expenses shows the profit or loss of the business.
The general format of a profit and loss statement starts by listing revenue from sales of goods and services. Subtracting the cost of goods sold then provides a gross profit (also called gross margin). Subtracting all the other expenses of running the business from the gross profit gives the net profit (or loss) before taxes. Subtracting taxes then gives the net profit (or loss) after taxes.
Cost Of Goods Sold
Calculating cost of goods sold is different for a manufacturer than for a retailer. A retailer can simply subtract the price paid for goods from the price for which the goods were sold to determine cost of goods sold. However, a manufacturer's costs include both the cost of raw materials to create a product, and the costs to manufacture the product. These costs fall into two categories: direct costs and indirect costs. Direct costs include the raw material, work-in-process inventories and labor directly involved in the manufacturing process. Indirect costs include indirect labor that supports manufacturing, costs of running the factory (overhead), materials and supplies.
Sometimes expenses are separated into two categories. Selling expenses are related to making sales — salespeople's salaries and commissions, advertising, sales office costs, warehousing and shipping. General and administrative expenses are not directly tied to sales and include non-sales personnel salaries, rent, utilities, telephone, supplies and other costs necessary to operate the business. Some expenses are fixed; that is, they are the same from month to month, like rent. Some expenses are variable, and change each month.
A P&L statement is a way to see if a business is making money, including identifying expenses that might be reduced or eliminated. Comparing P&L statements from one period to the next is an important tool for evaluating and adjusting operations.