Definition: The Profit and Loss statement, or income statement, summarizes a company’s revenues, costs, and expenses over a specified period.
Importance: It shows whether the company is generating profit or incurring losses, helping stakeholders evaluate operational performance.
Usage: Business owners, investors, and management use the P&L to assess profitability, make pricing decisions, and evaluate financial strategies.
Example:
A small bakery named "Sweet Treats" prepares its P&L for the first quarter:
- Revenues: $50,000 from sales'
- Cost of Goods Sold (COGS): $20,000 (ingredients).
- Operating Expenses: $15,000 (rent, utilities, salaries).
- Net Income: $15,000 (calculated as Revenues - COGS - Operating Expenses).
The owner reviews this P&L to confirm profitability and decides to invest in marketing to boost sales further.