How to prepare a profit and loss statement: a guide with examples

A profit and loss statement, or a company’s income statement, is a significant financial document that provides a snapshot of the company’s financial performance over a specified period, typically quarterly or annually. The statement shows whether a company has generated a profit or incurred a loss over the stated period by providing insights into revenues, costs, and expenses.

Usually, the income statement starts with the company’s total revenue (gross income) from sales of goods or services. Various expenses, such as the cost of goods sold, operating expenses, taxes, and interest payments, are then subtracted from the total revenue to arrive at the net income or net loss for the said period, highlighting the company’s profitability or lack thereof.

Importance of profit and loss statement

A profit and loss statement loss (P&L) is vital for business accounting, regardless of a business’s size or scale of operations. It offers valuable insights into a company’s ability to generate profits, manage expenses, and achieve financial goals. Stakeholders, such as investors, creditors, and management, consider these critical parameters to assess the company’s creditworthiness, investment potential, and overall financial health. By analyzing the trends in revenue and expenses over time, stakeholders can identify potential risks and opportunities and areas of strength and weakness for strategic decision-making, financial planning, and resource allocation.

A P&L statement serves as a fundamental tool for assessing financial performance. It facilitates clear communication through accurate financial reporting to internal and external parties, fostering trust and supporting informed decision-making for sustainable business growth.

Types of profit and loss statements

Depending on the industry, accounting standards, financial reporting requirements, and the specific needs of the business, a profit and loss statement can vary from one company to another. Some common examples of profit and loss statements include:

• Single-Step Profit and Loss Statement: A straightforward income statement that summarizes revenues and subtracts all expenses in a single step to calculate net income. They are commonly used by smaller businesses or those with simple financial structures.
• Multi-Step Profit and Loss Statement: This statement breaks down revenues and expenses into several categories to provide greater insights into the company’s financial performance. It typically includes gross profit, operating income, and net income to allow a more comprehensive analysis.
• Contribution Margin Income Statement: This statement focuses on the contribution margin (the difference between total revenues and variable expenses) to help understand how profitability is affected by changes in sales volumes. It is useful for decision-making in cost-volume-profit analysis.
• Comparative Profit and Loss Statement: Compares financial data from different periods, such as comparing year-on-year results or actual results with budgeted or forecasted figures, to help identify trends, deviations from expectations, and areas for improvement.
• Common-Size Profit and Loss Statement: Each item is a percentage of total revenue, making it easier to compare across different periods or among companies of various sizes. It helps identify cost structures and analyze the proportion of expenses relative to revenue.

Components of a profit and loss statement

A P&L statement comprises several vital components comprehensively overviewing a company’s financial performance. The main components include:

• Revenue: The total income, including sales revenue, interest income, and any other sources of income directly related to the primary business activities, generated from the sale of goods or services during the reporting period.
• Cost of Goods Sold (COGS): Also called the cost of sales, this refers to the direct costs associated with producing or acquiring the goods or services sold by the company. It includes costs incurred on raw materials, labor, and manufacturing overhead.
• Gross Profit: Calculated by subtracting the total cost of goods sold from the total revenue, gross profit indicates the profitability of the core business operations before considering other expenses such as operating expenses, taxes, and interest.
• Operating Expenses: The expenses incurred in the day-to-day operations of the business, including salaries and wages, rent, utilities, marketing expenses, depreciation, and administrative costs.
• Operating Income: Calculated by subtracting operating expenses from gross profit, operating income, operating profit, or earnings before interest and taxes (EBIT), reflects the profitability of the core business operations before considering non-operating items.
• Non-Operating Income and Expenses: Revenues and expenses, such as interest income, interest expense, gains or losses from investments, and foreign exchange gains or losses, that are not directly related to the primary business operations.
• Income Taxes: The amount of taxes that the company owes for the reporting period, calculated according to the applicable tax rates and tax regulations.
• Net Income: The final figure achieved after subtracting all expenses, including operating expenses, non-operating expenses, and income taxes, from the total revenue is called net income, the bottom line or net profit, and represents the company’s overall profitability for the period.

Step-by-step procedure to create a P&L statement

When creating a profit and loss statement, it is crucial to ensure accuracy and completeness, as it reflects your company’s financial performance and can be a vital tool in securing investment. The stepwise procedure to create an income statement is described below:

Example of a profit and loss statement

Preparing a profit and loss statement 

Preparing a comprehensive income statement manually can be a daunting task. Fingercheck’s payroll engine and integration with accounting software can streamline generating profit and loss statements by automatically consolidating financial data and categorizing income and expenses.

Our user-friendly interface, and customizable reporting features can help you manage profit and loss statements for accurate financial reporting, informed decision-making, and strategic planning. Get started today!

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Fingercheck and any related entities do not offer tax, accounting, or legal advice. This content is designed for informational purposes only and should not be considered a source of tax, legal, or accounting advice. It is recommended that you consult your tax, legal, and accounting advisors before undertaking any related activities or transactions.