As the founder of a startup, having a solid grasp on your businessâs financial health is vital to making intelligent decisions about its present and future. Reviewing and comprehending the three basic financial statements is the key to that understanding.Â
The three basic financial statements are the income statement (or profit and loss statement), the balance sheet, and the cash flow statement, each of which provides a different perspective on your businessâs financial health andâwhen reviewed togetherâpaint a useful big-picture view of the financial health of your business.
A common source of confusion for first-time founders centers on the income statement vs. profit and loss statement, so letâs begin by taking a look at those terms.
Financial statements provide critical insight into a company’s financial performance Two of the most important financial statements are the income statement and profit and loss (P&L) statement. But what exactly is the difference between an income statement and a P&L statement?
In this comprehensive guide, we’ll explain the key differences between these two critical financial reports to provide clarity.
Overview
An income statement and P&L statement both show a company’s revenues, expenses, and net profit or loss over a period of time. While they share similarities, there are some key differences:
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Purpose The income statement focuses on overall profitability, while the P&L provides more granular insight into operating performance
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GAAP: Income statements adhere to GAAP formatting, while P&L statements have more flexibility.
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Scope: Income statements include non-operating items, while P&Ls focus solely on operating revenues and expenses.
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Audience: Income statements cater to external stakeholders, while P&Ls often serve internal needs.
Understanding the nuances between these two reports is crucial for business owners, investors, and other financial statement users.
What is an Income Statement?
An income statement summarizes a company’s revenues, expenses, gains, and losses over a period, usually a quarter or year. It provides a high-level overview of the business’s profitability and is a key report for assessing financial performance.
Income statements adhere to GAAP (generally accepted accounting principles) and contain both operating and non-operating items. Key elements include:
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Revenue: From sales of products/services, interest, dividends, etc.
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COGS: Costs directly associated with producing goods/services.
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Gross profit: Revenue minus COGS.
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Operating expenses: SG&A, R&D, depreciation, etc.
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Operating income: Gross profit minus operating expenses.
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Non-operating items: Interest, taxes, one-time gains/losses.
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Net income: Operating income plus non-operating items.
Public companies are required to issue income statements. They provide transparency into profitability for shareholders, creditors, and regulators.
What is a Profit and Loss Statement?
A profit and loss (P&L) statement shows revenues, costs, and expenses over a period to determine net profit or loss. It provides a detailed look at the drivers of profitability, specifically operating profitability.
P&Ls are more flexible than income statements. They may exclude non-operating items and do not have to follow strict GAAP formatting. Key elements are:
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Revenue: From sales of products/services.
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COGS: Costs of producing goods/services.
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Gross profit: Revenue minus COGS.
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Operating expenses: R&D, SG&A, payroll, utilities, etc.
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Net operating profit/loss: Gross profit minus operating expenses.
Private companies often use P&Ls for internal reporting. The focus is on operating performance rather than comprehensive net income. Owners can assess profit drivers and trends to guide decisions.
Key Differences Between Income Statements and P&L Statements
While income statements and P&Ls have similarities, some key differences include:
Purpose
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Income statement: Provides a comprehensive, high-level view of overall profitability. Critical for external stakeholders like shareholders.
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P&L statement: Focuses specifically on operating performance. Useful for owners/managers to analyze profit drivers.
GAAP Compliance
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Income statement: Follows GAAP rules for formatting and content.
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P&L statement: Flexible format, doesn’t have to adhere to GAAP.
Scope
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Income statement: Includes both operating and non-operating revenues/expenses.
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P&L statement: Typically only shows operating revenues and expenses.
Audience
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Income statement: Caters to external stakeholders like shareholders, lenders, regulators.
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P&L statement: Often used for internal management reporting and analysis.
Real World Examples
Let’s look at some real income statement and P&L examples to see the key differences in action.
Income Statement Example
Below is a snippet of Apple’s income statement from their Q4 2022 10-Q filing:
| (in millions) | Q4 2022 | Q4 2021 |
|---|---|---|
| Total net sales | $117,154 | $123,936 |
| Total COGS | $66,822 | $69,702 |
| Gross margin | $50,332 | $54,243 |
| Operating expenses | $14,316 | $12,755 |
| Operating income | $36,016 | $41,488 |
| Income before provision for taxes | $35,623 | $41,241 |
| Net income | $29,998 | $34,630 |
This shows Apple’s comprehensive net income and adheres to GAAP. It includes non-operating items like taxes and interest expense not shown here.
P&L Statement Example
A P&L for a small retailer might look like:
| Q1 2023 | |
|---|---|
| Sales revenue | $100,000 |
| COGS | $(50,000) |
| Gross profit | $50,000 |
| Operating expenses | $(30,000) |
| Net operating profit | $20,000 |
This focuses solely on operating revenues and costs. Non-operating items like interest or taxes are excluded. The format is also more flexible.
Key Takeaways
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Income statements and P&Ls both report revenues, expenses, and profitability over a period. But key differences exist.
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Income statements provide a comprehensive, GAAP-compliant view of overall profitability. P&Ls hone in on operating performance.
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P&Ls are often used for internal reporting, while income statements cater to external stakeholders.
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Understanding these nuances is crucial for business owners, investors, creditors, and other financial statement users. Analyzing both reports can provide unique insights into a company’s performance.
Income Statement Vs. Profit And Loss Statement Â
One of the most fundamental questions first-time startup founders have about the three basic financial statements is, âIs profit and loss the same as income statement?â
Fortunately, the answer to this one is exceptionally simple: Yes, theyâre the same thing. With that in mind, weâll be using the terms profit and loss (P&L) and income statement interchangeably from here on out. This statement is sometimes alternatively referred to as the statement of revenue and expense, or the statement of operations, but since those terms are significantly less common, we wonât use them again here.Â
Now that we have that clarification out of the way, letâs go into a bit more detail about what the income statementâor profit and loss statementâis and how it works.
What is the income statement?
An income statement summarizes the businessâs operations during a given financial period (usually a month, quarter, or year). Itâs the most commonly used financial statement across businesses of all sizes and is generally considered the most important of the three basic financial statements, as it shows the companyâs ability (or inability) to generate profit over a period of time.Â
Additionally, you can use the data contained in the P&L statement to measure the businessâs profitability according to commonly used profitability ratios like profit margin and gross margin ratios.
The basic equation on which the income statement is built is:Â
Income = (Total Revenue + Gains) â (Total Expenses + Losses)Â
In this equation:Â
- Revenue is the money the company receives from normal business operationsâthat is, sales of the primary products or services you offer customers.
- Gains are any economic benefit outside of normal business operations, for instance, the sale of a long-term asset for more than the amount shown on the companyâs books.
- Expenses are the economic costs of earning revenue, for instance, rent, employee wages, utilities, etc.Â
- Losses are economic costs incurred outside of normal business operations, for instance, the sale of a long-term asset for less than the amount shown on the companyâs books.
By monitoring the data in your income statements over time, you can gain an understanding of the trajectory of your businessâs financial performance, set and keep track of goals, and identify problem areas. For a more detailed explanation of P&L statements and how to read and interpret them, check out our blog post on the topic.
The INCOME STATEMENT Explained (Profit & Loss / P&L)
What is the difference between P&L and income statement?
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.
What is a business profit and loss statement?
A business profit and loss statement shows you how much money your business earned and lost within a period of time. There is no difference between income statement and profit and loss. An income statement is often referred to as a P&L. The income statement is also known as statement of income or statement of operations.
What is the difference between profit & loss vs income statement?
Since profit and loss vs. income statement are actually the same, the terms will be used interchangeably throughout this article. Use the P&L statement to summarize monthly, quarterly, or annual operations. The information can show you where your money is going.
What is an income statement?
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.
