What Is a Profit & Loss Statement?
A Profit and Loss statement—often called a P&L or income statement—summarizes a business's income and expenses over a selected period, such as a month, quarter, or year.
The exact layout varies by business and accounting setup, but the purpose is the same: to summarize financial performance during a period of time.
Income
The income section generally shows revenue generated by the business during the report period. Depending on the business, income may be separated into different products, services, or revenue categories.
Useful questions include whether revenue is increasing or decreasing, which revenue streams contribute most, and whether the amounts are consistent with what the owner expects to see.
Cost of Goods Sold
Some businesses have costs directly associated with producing or delivering what they sell. When applicable, these may appear as Cost of Goods Sold or Cost of Sales.
Subtracting those direct costs from related income produces gross profit. Not every service business will use this section in the same way, so the chart of accounts should reflect the actual business model.
Operating Expenses
Expenses can include costs such as software, insurance, advertising, professional services, office expenses, payroll-related costs, and other ordinary business expenditures. How those costs are categorized determines how they appear on the P&L.
Consistent categorization makes comparisons between months and periods more meaningful.
Net Profit or Net Loss
After the applicable income and expenses on the statement are accounted for, the report shows the business's net profit or net loss for that period.
A positive net result means the income shown on the P&L exceeded the expenses shown for that period; a negative result means the expenses exceeded the income shown.
Why the Date Range Matters
A P&L always represents a period of time. A report for one month answers a different question than a year-to-date report. Comparing the same types of periods can help identify changes in revenue and expenses.
Seasonality can also matter. A strong or weak month does not necessarily represent the business's normal performance, so context is important when reviewing trends.
Why Accurate Bookkeeping Matters
A financial report can only reflect what has been recorded in the books. Missing transactions, duplicate entries, incorrect categories, or unreconciled accounts can affect the usefulness of the P&L.
That is why reviewing transactions and reconciling accounts are important parts of a consistent bookkeeping process. Reports become more useful when the underlying records are current and organized.
Questions to Ask When Reviewing Your P&L
- Does the income shown look reasonable for this period?
- Are there unusually high or low expense categories?
- Are any transactions sitting in categories that do not make sense?
- How does this month or quarter compare with prior periods?
- Are the accounts supporting the report reconciled and current?
- Are there significant changes that need further investigation?
Carlisle Bookkeeping Financial Reporting Support
Carlisle Bookkeeping LLC provides monthly bookkeeping and financial reporting designed to help business owners receive organized, current financial information. Services can also include QuickBooks Online support, reconciliations, cleanup and catch-up bookkeeping, and additional bookkeeping support based on the selected service level.
If your books are behind, qualifying businesses may receive up to six months of eligible catch-up bookkeeping at no additional cost when beginning ongoing monthly bookkeeping services. Eligibility and scope are determined after reviewing the business's bookkeeping needs.
Learn about the Catch-Up Bookkeeping Offer →
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