The profit and loss statement (P&L) is a key management accounting tool that helps companies assess their financial performance over a period of time. By understanding the P&L, entrepreneurs and investors can make informed decisions and better assess the economic health of a company.
P&L stands for Profit and Loss and is a basic financial concept that shows whether you are making or losing money over a specific period. It is calculated by subtracting total costs and expenses from total revenue.
If the result is positive, you have a profit, meaning you earned more than you spent. If it is negative, you have a loss, meaning your expenses exceeded your income. P&L is commonly used by businesses to evaluate performance, by traders to track gains and losses on investments, and by startups to understand their financial health and sustainability.
The profit and loss account (P&L) is divided into various items that systematically record a company's income and expenses. Here is a typical P&L structure:
This structured layout helps to present the financial performance of a company clearly and transparently and provides a sound basis for business management decisions
| Criterion | Balance sheet | Income statement | Cash Method of Accounting |
| Purpose | Presentation of the assets and liabilities of a company | Determination of the annual result (profit or loss) | Determination of the taxable profit for smaller companies |
| Contents | Assets (assets) and liabilities (debts and equity) | Income and expenses | Income and expenses (simplified form) |
| Date of preparation | At the end of a financial year | For the entire accounting period (usually financial year) | For the entire accounting period (usually financial year) |
| Legal form/application | Mandatory for corporations and larger companies | Mandatory for all companies required to keep accounts | For freelancers, small traders and sole traders not required to keep accounts |
| Result | Net assets: Comparison of assets and liabilities | Income statement: Difference between income and expenses | Taxable profit: Difference between income and expenses |
The obligation to prepare a profit and loss statement (P&L) depends on the legal form and size of the company as well as the legal requirements in the respective country. Here are the main categories of companies that are required to prepare a P&L:
Companies must prepare a profit and loss statement if they are required to keep accounts in accordance with Section 141 of the German Fiscal Code (AO), in particular if they:
| Term | Meaning |
| Revenue | Income from the sale of products or services |
| Changes in inventories | Changes in inventories of finished goods and work in progress |
| Other own work capitalized | Internally generated and used services within the company |
| Other operating income | Income that does not originate from the core business (e.g. rental income) |
| Cost of materials | Cost of raw materials, consumables and supplies as well as purchased goods |
| Personnel expenses | Expenses for wages, salaries and social security contributions |
| Depreciation and amortization | Impairment of fixed assets |
| Other operating expenses | Operating costs such as rent, advertising, insurance, etc. |
| Operating result | Result from ordinary activities |
| Financial income | Income from financial transactions, including interest and dividends |
| Financial expenses | Expenses from financial transactions, including interest |
| Result from ordinary activities | Sum of operating and financial result |
| Extraordinary income | Non-recurring and unusual transactions |
| Extraordinary expenses | Expenses from non-recurring and unusual transactions |
| Earnings before taxes | Earnings before taxes |
| Taxes | Expenses for income and other taxes |
| Net profit/loss for the year | Final result of the income statement, the final profit or loss for the financial year |
The Profit and Loss statement (P&L) calculates a company's net income or net loss by comparing total income and expenses. Below, you will find the fundamental formulas and a detailed case study for calculating the annual result.
The Profit and Loss (P&L) statement breaks down a company's financial success into individual business segments:
1. Operating Result (EBIT)
Operating Revenue + Changes in Inventories + Own Work Capitalized − Material − Personnel − Depreciation − Other Operating Expenses.2. Financial Result
Financial Income (Interest) − Financial Expenses (Interest Paid).3. Extraordinary Result
Extraordinary Income − Extraordinary Expenses.Step 1: Operating Result (EBIT)
This stage consolidates all costs and revenues from core business operations:
Step 2: Financial Result & Ordinary Activities
Step 3: Extraordinary Result & Taxes
In the income statement, income and expenses can be presented according to the net or gross principle. Both principles differ fundamentally in their presentation system and affect the transparency and comprehensibility of a company's financial reporting.
The gross principle stipulates that all income and expenses must be reported separately in the income statement. There is no offsetting. Each individual expense and each individual income is recorded in full. This provides a detailed picture of the company's economic activity. Transparency is high, as the composition of the operating result is clearly recognizable. External parties such as investors, lenders, or analysts benefit particularly from this form of presentation.
In contrast, the net principle involves offsetting income and expenses that belong together in terms of content and reporting them only as a balance. This makes the income statement more compact and clearer. However, some of the detailed information is lost because individual cost or revenue components are no longer visible separately. This limits the comprehensibility for outsiders.
In terms of clarity, the net principle offers advantages because it reduces the number of items in the income statement. The gross principle, on the other hand, is less clear, but significantly more meaningful and transparent. In practice, therefore, the gross principle is predominantly used, especially by larger and capital market-oriented companies. It meets the increased information requirements of external stakeholders and complies with current accounting regulations.
The net principle is mainly used in specific cases or for smaller companies when a simplified presentation is sufficient or legally permissible. It can help to focus the income statement on the essentials without distorting the reported annual results.
The income statement can be presented in various forms, which differ mainly in their structure and level of detail. Here are the most important forms of income statements:
These different forms of P&L enable companies to present their financial results in a flexible manner tailored to their specific needs.
Forms of presentation of the P&L
The profit and loss statement (P&L) can be presented in two different forms: the account form and the step form. Both formats have their specific characteristics and possible applications. The step format of the P&L is more common in practice, as it enables a detailed and transparent presentation of a company's earnings situation. The account format is simpler in structure, but less informative. Both formats have their raison d'être and can be used depending on the requirements and preferences of the company.
The P&L can be presented in two different forms: the account form and the scale form. Both forms have their specific characteristics and possible uses. In practice, the scaled form of the income statement is more common, as it enables a detailed and transparent presentation of a company's earnings situation. The account form has a simpler structure but is less informative. Both forms have their raison d'être and can be used depending on the company's requirements and preferences.
The scale form shows the income and expenses in relation to each other and calculates the profit or loss step by step. Both the nature of expense method and the cost of sales method can be presented in the scale form.
Examples of this follow in the explanation of the methods.
The account form is similar to a T-account, where income and expenses are compared. This form is rarely used as it is less detailed.
Example of the account form:
| Income | Expenses |
| Sales Revenue | Personnel Expenses |
| Other Own Work Capitalized | Depreciation |
| Other Operating Income | Other Operating Expenses |
| Financial Income | Extraordinary Expenses |
| Total Income | Total Expenses |
| Profit/Loss |
The P&L statement can be prepared using two different methods: the total cost method and the cost of sales method. Both methods have specific features and classifications. Both methods have their advantages and disadvantages and the choice of method often depends on legal requirements, international accounting standards and the specific needs of the company.
The nature of expense method records all income and expenses for the financial year and breaks them down by cost type.
Example of the total cost method in scale form:
+ Sales revenue
+/- Changes in inventories
+ Other own work capitalized
+ Other operating income
- Cost of materials
- Personnel expenses
- Depreciation and amortization
- Other operating expenses
= Operating result
+ financial income
- Financial expenses
= Result from ordinary activities
+ Extraordinary income
- Extraordinary expenses
= Result before taxes
- Taxes
= Annual Income/Loss
The cost of sales method allocates expenses to the sales generated and classifies them according to functional areas.
Example of the cost of sales method in scale form:
+ Sales revenue
- Cost of sales of the services rendered to generate the sales revenue
= Gross profit from sales
- Selling expenses
- General administrative expenses
+ Other operating income
- Other operating expenses
= Operating result
+ Financial income
- Financial expenses
= Result from ordinary activities
+ Extraordinary income
- Extraordinary expenses
= Result before taxes
- Taxes
= Annual Income/Loss
The operating result in the P&L is the balance of operating income and expenses, which shows how profitable a company's core business is. It shows how successful the company has been in its ordinary business activities, excluding financial results, extraordinary results and taxes.
The P&L Account is neither an asset nor a liability, but a profit and loss account that is closed in equity at the end of the year.
The P&L contains income and expense accounts.
No, the Business Assessment and the P&L statement are not the same thing; the Business Assessment is a short-term, internal evaluation for company management, while the P&L statement is part of the annual financial statements and is required by law.
The annual income/loss from the income statement is included in the balance sheet as part of equity.
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