What is Profit and Loss?

The Profit and Loss (P&L) Statement is also known as the Income Statement. It shows how well a company buys and sells inventory (or services) to make a profit. A business must create a profit in order to survive and remain solvent. Careful analysis of the components of a P&L is important in determining the cash flow available to repay existing debt, finance additional debt (for business expansion), or to reinvest in the company.

Just as the Balance Sheet is a snapshot of the financial condition of a company at a certain point in time, the Profit and Loss statement shows the results of financial operations over a period of time. The amount of time could be a month, a quarter of a year, a half year, or a year.

The categories of a profit and loss statement are arranged in a specific order regardless of the legal form of the business (i.e., sole proprietor, C corporation, etc.). Within each category, revenues and expenses may be listed separately or grouped. Financial reporting needs to remain consistent over a period of time. Listing the same type of expense under different headings year after year may raise a red flag.