Understanding P/L statement

P/L statement is one of the three major financial statements a company prepares to showcase its performance. P/L statement is also known as Income statement or Statement of Earnings because it depicts the revenue earned by a company in a particular financial year.

This statement begins by recording the revenue of the company. Here, revenue means total sales receipts of the company from goods as well as services. In P/L, revenue is also commonly referred to as topline

After that, we record the various expenses incurred in earning the revenue. For instance, we deduct expenses like the cost of goods sold, operating expenses, tax expenses, depreciation and interest expenses.

After deduction, the difference we receive gives us the net income, which is also commonly referred to as the “bottom line”.

To get a clear idea about the performance of the company, one must compare the P/L statement of different accounting periods.

In other words, we must track the changes in revenues, operating expenses, net earnings and other related financial items. For instance, a company’s revenue may rise at a steady rate but its expenses may even at a greater pace. So, the numbers need to be analysed in order to make beneficial financial decisions.

Overall, the P/L statement helps us to gauge the profitability of any company. Through the data derived from this statement, combined with data from other statements, we can derive various financial metrics to find whether the business is investable or not.