Income Statement Vs Profit And Loss Statement 

Income statements are reports that state the financial health of a company. It provides a summary of the earnings and expenses for a given time, typically one month, quarter, or year. The income statement is often also referred to as the profit and loss (P&L) statement. Though technically, they are similar, some refer to it as a P&L statement because it highlights the company's net profit or loss. The minor differences lie in the exclusion and inclusion of certain items.

• Income statements provide a detailed overview of a company's earnings and expenses for a specific period. They are also known as profit and loss statements and highlight the company's net profit or loss.
• The income statement focuses on the overall profitability of a business, while the P&L statement provides a more in-depth understanding of operational effectiveness.
• The income statement is presented in a structure that adheres to GAAP requirements, while the profit and loss statement is used by smaller organizations or for internal purposes.
• They both help businesses assess the success of their strategies and make informed business decisions.

Let us look at a few differences to understand both concepts:

An income statement is a key statement that reveals a company's earnings for a given period by giving an in-depth overview of its revenue and expenses. Also, it can be referred to as an earnings statement, a statement of operation, a financial result or income statement, or a profit and loss statement. It assists company owners in figuring out whether they can gain profit by increasing revenue, cutting expenses, or doing both.

The income statement also provides information on how well the strategies implemented at the start of a financial period worked, enabling business owners to assess the success of their plans and come up with the best ways to increase profit.

Regular reports on a company's performance are provided by this statement, which helps investors and business owners make well-informed decisions. Also, it lists potential future costs that may rise as the business expands, such as rent, salaries, and overheads. In addition, the statement offers a broad overview of the business, assisting lenders and investors in assessing the company's before taxes, EPS, and earnings before interest, taxes, depreciation, and amortization (EBITDA).

Let us look at a simple hypothetical example to understand the concept.

Suppose ABC Ltd is a cloth manufacturing company.

Given values for the year 2023:

• sales of in-store goods: $20,000,
• online sales: $ 15,000,
• other income: $ 50,000,
• total revenue: $85,000, and
• cost of goods sold: $55,000.

Their operating costs:

• Utilities: $500,
• wages: $500,
• rent: $200,
• advertising: $200,
• transportation and storage: $500

Therefore, the income statement for ABC Ltd. is in detail:

• Sales of in-store goods: $20,000
• Online sales: $15,000
• Other income: $50,000
• Total revenue: $85,000
• Cost of goods sold: $55,000

Gross profit = total revenue of ABC - cost of goods sold

= $85,000 - $55,000

= $30,000

Operating costs:

• Utilities: $500
• Wages: $500
• Rent: $200
• Advertising: $200
• Transportation and storage: $500
• Total operating costs: $1,900

EBITDA = Gross profit - total operating costs

= $30,000 - $1,900

= $28,100

Other expenses:

• Taxes (T): $20,000
• Interest (I): $250
• Depreciation (D): $700

Net income = EBITDA - (T + I + D)

= $28,100 - ($20,000 + $250 + $700)

= $7,150

The profit and loss statement gives us a comprehensive view of a company's profit. Sales volume, also known as net sales; cost of goods sold, also known as cost of items sold; and operational expenditures make up its three primary components. Thus, a detailed P&L statement consists of five main factors: net sales, cost of goods sold, gross profit, operating expenses, and net profit.

Therefore, a P&L statement is a financial record for companies that shows net profit or loss and facilitates control over earnings through cost-cutting and revenue-growth strategies. In addition, it supports resource allocation by assisting in the analysis of profitability, net income, and revenue and spending trends. Thus, a P&L report is necessary to show how a business manages revenues and expenses and to file a tax return with the IRS.

Analysts and investors can assess a company's profitability by contrasting net income with shares issued to shareholders. Thus, the P&L statement is one of the three types of financial statements, the others being the balance sheet and cash flow statement. It helps in evaluating a company's return on equity (ROE).

Let us look at a simple hypothetical example to understand the concept.

Suppose XYZ Ltd, a tire manufacturing company for the year 2023, has recorded a net sale of $80,000; their cost of goods sold is $30,000, and operating expenses are $12,000. Let us find out their net profit. Here, to find out the net profit, we do the following steps:

First, deduct the cost of goods sold from the net sales amount. This gives the gross profit. The operating expenses are then subtracted from the gross profit to arrive at the net profit. Therefore, the in-detail P&L statement is:

P&L factors:                       

Gross profit (margin) = Net sales − Cost of goods sold

= $80,000 - $30,000 

= $50,000 

Net profit = Gross profit − Operating expenses

= $50,000 - $12,000 

= $38,000 

Profit and loss statements and income statements offer a thorough summary of a business's financial performance during a given reporting period. They display income, costs, and net profit or loss in a manner similar to one another. Their formats also reflect similar patterns: revenue numbers are at the top, and expenditure items are at the bottom in descending order.

The net profit or loss realized during the reporting period is displayed on the bottom line. Therefore, businesses find it more straightforward to comprehend their financial performance over time as a result of these similarities. However, a thorough examination must take into account a few crucial distinctions.

This article has been a guide to Income Statement vs Profit & Loss Statement. We explain them with their definitions, examples, a comparative table, & similarities. You may also find some useful articles here -

• Income Statement vs Balance Sheet
• Pro Forma Income Statement
• Multi Step Income Statement