A Profit and Loss Statement (or “P&L Statement”) can go by several names, such as “Income Statement”, “Earnings Report”, or even “Operating Statement”. But in all cases, they mean the same thing: a P&L is simply a document that shows how much profit (or “net income”) your business made over a certain time period. It is one of the two key types of financial statements for SMBs and, like all financial statements, it’s a historical statement — it looks back at what has already happened.
Because P&Ls are used to tell how profitable your business is, it’s an absolutely essential tool for evaluating how well your business is performing. Furthermore, in my opinion, it is the single most important report you can have for staying on top of your business. It’s also used every tax season for preparing your tax returns.
The Basic Profit Equation
A P&L statement is generally broken up into two main sections: income and expenses. The income and expenses sections are very often broken down further into additional sections, as discussed below. However, in the end a P&L is simply a product of the basic profit equation:
|Equals: Profit (or Loss)|
Below is a screenshot of what a Profit and Loss statement looks like in QuickBooks Online (with some highlights to show each section — click to enlarge):
Income and expenses are broken up into different income and expense categories, or “accounts”, as seen in the screenshot of the Profit and Loss statement. The statement above has income broken down to income from services and income from the sales of products. In expenses, we have Cost of Goods Sold (sometimes referred to Cost of Sales) accounts, which are a special type of expense account you’ll learn more about later, and two basic expense accounts for equipment rentals and office expenses.
Businesses often have many accounts and sub-accounts for both income and expenses. This provides better details and insight about where the money coming in (income) is coming from and where the money going out (expenses) is going to. Many businesses will have similar types of income and expense accounts. Ultimately, though, all businesses are unique, so it’s rare for any two businesses to have the exact same income and expense accounts on their P&L Statement as another.
Importance of Timely Accounting and AIS
The helpfulness and reliability of a Profit and Loss statement depends on keeping your accounting both up-to-date and accurate. Every single revenue and expense transaction you enter into your accounting system directly impacts the P&L, so if there are transactions missing in the system because you have not entered them yet, then the P&L will not be accurate for the time period in question and the information found therein cannot be relied on.
The benefit of having an Accounting Information System (“AIS”) like QuickBooks Online is that it helps you gather and enter your accounting transactions faster, and will automatically generate your P&L Statement for any given time period without requiring any additional work from you or your accountant.
Moving On to the Balance Sheet
Once you feel comfortable that you understand how the P&L statement works, you are ready to learn about the other key financial statement, the Balance Sheet. The results of the P&L Statement, i.e. the net income (or loss) of the business, directly feeds into the owner’s equity section of the Balance Sheet. The accuracy of the Balance Sheet, therefore, depends on the accuracy of the P&L Statement.