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Profit and Loss Statement (P&L)

Understand the Profit and Loss (P&L) Statement Filing

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Profit and Loss Statement (P&L)

In This Article
  • What is the definition of the profit and loss statement?
  • Is the profit and loss statement the same as the income statement?
  • Which sorts of insights can be obtained from a company’s P&L?
  • What is the difference between the two P&L accounting approaches: cash-basis and accrual accounting?

How to Calculate the P&L Statement

The term profit and loss (P&L) statement is interchangeable with the income statement, one of the three core financial statements that all publicly traded companies are obligated to file with the SEC.

For public companies listed in the U.S., the 10-Q P&L must be filed each quarter, with a 10-K annual filing due for the 4th quarter.

Together, alongside the cash flow statement and balance sheet, the P&L statement provides a detailed depiction of the financial state of a company.

In particular, the P&L statement shows the operating performance of the company as well as the costs and expenses that impact its profit margins.

Upon assessing a company’s P&L statement, one can gauge the company’s ability to:

The standard profit and loss (P&L) statement consists of the following line items:

  • Revenue: Sales Generated from Customers
  • Cost of Goods Sold (COGS): Costs Directly Associated with Core Revenue Production
  • Operating Expenses / SG&A: Indirect Costs NOT Directly Related to Revenue Creation
  • Interest Expense: Periodic Payments on Debt Obligation (i.e. Cost of Debt Financing)
  • Taxes: Required Payments to City, State, and Federal Government
  • Net Income: “Bottom Line” Profitability Post-Deduction of All Costs/Expenses

P&L Statement – Accrual Accounting vs. Cash Basis Accounting

The P&L statements can be prepared by an accountant under two methods:

Accrual Accounting

  • Under the revenue recognition principle, revenue is recognized when “earned” under GAAP standards (i.e. product or service delivered to the customer regardless of whether cash payment was received)
  • Expenses are matched in the same period as the corresponding revenue they helped create, which is called the matching principle.
  • P&L statements filed under accrual accounting are required under U.S. GAAP standards.

Cash-Basis Accounting

  • Under cash accounting, revenue is not recognized until the customer pays in cash to the company for the products/services received
  • Expenses under cash accounting, similar to revenue, are not recognized until the cash outflow occurs – meaning that the company has actually paid the third party in cash.
  • P&Ls prepared under cash-basis accounting are more common for private companies.

Profit and Loss Statements for Private Companies

Note that for many private companies, revenue is recorded as “income” and the expenses are often combined together in a single section, rather than distinguishing between:

  • COGS vs OpEx
  • Direct Costs vs Indirect Costs
  • Core Costs vs Non-Core Costs

The lack of standardization for private companies makes adjusting the financials often a necessary step to properly evaluate the actual financial performance of the company.

For instance, in the context of an acquisition where the acquirer follows accrual accounting, adjustments to a target company’s financial statements would be necessary if it follows cash accounting.

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