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Many American companies are required by law to complete a profit and loss statement. So what is a profit and loss statement? Also known as a P&L or income statement, a profit and loss statement is a financial statement that accounts for your business’s revenues, costs, and expenses. The period of time that a profit and loss statement summarizes can vary, but it typically covers the fiscal quarter and year.
In its purest form, a profit and loss statement is just a subtraction equation: you put your revenue up top then subtract the various costs you incurred from operating your business. This middle section might include tax expenses, interest expenses, cost of goods sold, and many other factors.
What you reach at the bottom of your statement is your net income, or what’s left of the revenue after you’ve covered all your expenses. You’ve probably heard of this referred to as the “bottom line,” as it literally comes at the end of the statement.
Every profit and loss statement is a litmus test for your profitability. Various parties, such as a lender or a board of directors, will want to review the statement to see how successfully you bring in profits when losses are also taken into account.
It takes careful management to boost revenue and curtail expenses, and these efforts are reflected in your profit and loss statement. Public companies release their profit and loss statements on a quarterly and annual basis, making it possible to stack current statements against past ones. This is an essential measure, as your efficiencies and growth (or lack thereof) become readily apparent.
Perhaps you’re wondering, “What’s a profit and loss statement’s main purpose?” If you’re a public company, you must issue these statements consistently to comply with regulations. Every quarter and year, you’ll release them along with your cash flow statement and balance sheet.
Beyond these obligatory purposes, your profit and loss statement can be a powerful asset to your business plan. It will help to guide your strategy and allow lenders to evaluate your profitability as they consider your business for financing.
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