Profit and Loss Account (P&L)

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 Definition: What is P&L?

The income statement is an essential element of a company's annual financial statements, showing income and expenses over a specific period - usually a financial year. Its main purpose is to measure the success or failure of a company by determining the profit made or loss incurred.

The income statement structures the financial activities of a company and shows:

Revenue: All revenue from the sale of goods and services and other income.
Expenses: All costs and expenses incurred in the course of business activities, such as material costs, personnel expenses, depreciation and other operating expenses.

By comparing income and expenses, the company's net profit is calculated, i.e. the profit if income exceeds expenses, or the loss if expenses are higher than income. The income statement thus provides important information for Corporate Management, investors and other stakeholders to assess the financial situation and performance of the company.

P&L Structure: How to create a P&L?

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:

Revenue:
- Income from the sale of goods and services.
Changes in inventories:
- Increase or decrease in inventories of finished goods and work in progress.
Other own work capitalized:
- Internally generated and used services that are not sold but used within the company itself.
Other operating income:
- Income that does not originate from the core business, such as rental income, interest income.
Cost of materials:
- Expenses for raw materials, consumables and supplies and for purchased goods.
Personnel expenses:
- Wages and salaries as well as social security contributions.
Depreciation and amortization:
- Impairment of fixed assets (property, plant and equipment, intangible assets).
Other operating expenses:
- Costs for rent, advertising, insurance, office supplies, etc.
Result from ordinary activities:
- Operating result resulting from the difference between the above income and expenses.
Financial result:
- Interest income and interest expenses as well as other financial expenses and income.
Extraordinary income and expenses:
- Non-recurring and extraordinary business transactions that are not part of ordinary business activities.
Taxes on income and earnings:
- Trade tax, corporation tax, income tax.
Net profit/loss for the year:
- The final profit or loss after tax.

This structured layout helps to present the financial performance of a company clearly and transparently and provides a sound basis for business management decisions.

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P&L Meaning: Difference between Balance Sheet, P&L and Cash Method of Accounting

The table with the differences between the balance sheet, profit and loss account (P&L) and Cash Method of Accounting (Cash Method of Accounting) shows the different purposes, contents, preparation dates, areas of application and results of these important business management instruments in comparison. Here is the table with the differences between the balance sheet, income statement and Cash Method of Accounting:

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

Who has to prepare a Profit and Loss Account?

The obligation to prepare a profit and loss account (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 must prepare a P&L:

Corporations

GmbH (limited liability company): Obligated to prepare an income statement as part of the annual financial statements in accordance with the German Commercial Code (HGB).
AG (public limited company): Must prepare and publish a P&L, also in accordance with the HGB.

Partnerships

OHG (general partnership) and KG (limited partnership): Must prepare a P&L if they meet the criteria for mandatory accounting, e.g. exceeding certain turnover or profit limits.

Sole proprietorships and freelancers

Sole proprietorships: If they are entered in the commercial register (merchant according to HGB) or exceed the turnover and profit limits, they are obliged to prepare a P&L.
Freelancers: Generally not obliged to prepare a P&L unless they voluntarily opt for double-entry bookkeeping.

Small companies and small entrepreneurs

Cash Method of Accounting (income statement): Small entrepreneurs and smaller businesses that are not required to keep double-entry accounts can prepare a cash method of accounting (Cash Method of Accounting) instead of a P&L.

Criteria for the obligation to prepare a balance sheet (Germany)

Companies must prepare a P&L if they are obliged to keep accounts in accordance with Section 141 of the German Fiscal Code (AO), in particular if they:

sales in excess of 600,000 euros in a calendar year or
make a profit of more than 60,000 euros in a financial year.

Summarized overview

This table provides an overview of which types of companies are obliged to prepare a P&L and under what conditions.

Company Type	Obligation to prepare a P&L?
GmbH	Yes, according to HGB
AG	Yes, according to HGB
OHG & KG	Yes, if required to prepare a balance sheet
Sole proprietorship	Yes, if entered in the commercial register or turnover/profit limits exceeded
Freelancer	No, except for voluntary double-entry bookkeeping
Small business owners	No, can use Cash Method of Accounting

Conclusion

The obligation to prepare a P&L depends on the legal form of the company, the turnover and profits generated and the entry in the commercial register. Corporations are always obliged to prepare a P&L, while smaller companies and freelancers can use a Cash Method of Accounting under certain conditions.

Important terms for the P&L

Terms relating to the income statement

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

This table summarizes the most important terms and their meanings in the income statement.

Calculation of P&L

The income statement calculates a company's net profit or loss for the year by comparing income and expenses. The following are the basic formulas for calculating the result.

P&L Example

Let's assume we have the following figures:

Sales Revenue: 鈧� 500,000
Changes in Inventories : 鈧� 10,000
Other own work capitalized: 鈧� 5,000
Other Operating Income : 鈧� 20,000
Cost of Materials: 鈧� 200,000
Personnel Expenses: 鈧� 150,000
Depreciation and Amortization : 鈧� 30,000
Other Operating Expenses: 鈧� 50,000
Financial Income : 鈧� 10,000
Financial Expenses : 鈧� 5,000
Extraordinary Income: 鈧� 5,000
Extraordinary Expenses : 鈧� 3,000
Taxes : 鈧� 35,000

Profit - Loss Basic Formula

The complete basic formula is as follows:

Detailed Calculation

The formula can be broken down into its individual components to make it clearer and easier to understand:

Operating Result

All amounts of money that occur in the company are included here.

Example Calculation: Operating Result = (鈧�500,000 + 鈧�10,000 + 鈧�5,000 + 鈧�20,000 - 鈧�200,000 - 鈧�150,000 - 鈧�30,000 - 鈧�50,000) = 鈧�105,000

Financial Result

All financial amounts are offset in this section.

Example Calculation: Financial Result = (鈧�10,000 - 鈧�5,000) = 鈧�5,000

Result from Ordinary Activities

All business activities, operating and financial results, are offset here.

Example calculation: Result from Ordinary Activities = 鈧�105,000 + 鈧�5,000 = 鈧�110,000

Extraordinary Result

The extraordinary amounts are offset in this section.

Example calculation: Extraordinary Result = (鈧�5,000 - 鈧�3,000) = 鈧�2,000

Earnings before Taxes

The two previous results are now offset before taxes come into play.

Example Calculation: Earnings before taxes = 鈧�110,000 + 鈧�2,000 = 鈧�112,000

Annual Net Profit/Net Loss

Finally, taxes are deducted, and the final result is obtained.

Example Calculation: Annual Income/Loss = 鈧�112,000 - 鈧�35,000 = 鈧�77,000

In this example, the net profit for the year amounts to 鈧� 77,000. This structure and calculation show how the various types of income and expenses contribute to the determination of a company's financial result.

The net and gross principle of the P&L statement

The net and gross principles are two different methods of presenting income and expenses in the income statement. Both principles have their specific applications and influence the transparency and comprehensibility of a company's financial information.

Comparison of Net and Gross Principle

This table summarizes the main differences and features of the two principles.

Criterion	Net Principle	Gross Principle
Presentation	Only balance of income and expenses	Complete separation of income and expenses
Transparency	Lower	Higher
Comprehensibility	More difficult	Easier
Clarity	Higher	Lower
Application	Specific situations, smaller companies	Larger and capital market-oriented companies

Application in Practice

In practice, the gross principle is often used, especially for larger and capital market-oriented companies, as it offers greater transparency and depth of detail. The net principle can be used in specific situations or for smaller companies in order to simplify the presentation.

Conclusion

The choice between the net and gross principle depends on the requirements for transparency, comprehensibility and clarity of financial reporting. The gross principle offers a more detailed and transparent presentation, while the net principle enables a simplified and clearer presentation. Companies should choose the method that best suits their reporting requirements and legal requirements.

Forms and Methods of the P&L

The P&L can be presented in various forms, which differ mainly in their structure and level of detail. Here are the most important forms of the profit and loss account:

Overview: Methods & Forms of the P&L

The following diagram shows the forms and methods of the P&L.

Explanation: Forms of Profit and Loss Statement

These different forms of P&L allow companies to present their financial results in a flexible way that is adapted to their specific needs.

The 2 Forms of Presentation of the P&L

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'锚tre and can be used depending on the company's requirements and preferences.

Scale Form

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.

Account Form

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

Overview: Account Form and Scale Form of the P&L Statement

This table summarizes the main differences and features of the two forms of presentation of the P&L statement.

Criterion	Scaled Form	Account Form
Form	Intercompany	T-account-like
Presentation	Step-by-step calculation of profit or loss	Comparison of income and expenses
Clarity	Very detailed	Less detailed
Widespread	Widespread	Less widespread
Advantages	Detailed, transparent presentation, clear profit levels	Simple structure, quick comparison

The 2 P&L Methods

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.

Total Cost Method

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

Cost of Sales Method

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

Overview: Total Cost Method and Cost of Sales Method of the P&L

This table summarizes the main differences and characteristics of the two methods, the total cost method and the cost of sales method, for preparing a P&L statement.

Criterion	Total Cost Method	Cost of Sales Method
Breakdown	By cost type	By functional area
Transparency of production costs	Detailed breakdown	Focus on distribution costs and administrative costs
Application	Widely used in Germany	Widely used in an international context
Advantages	Comprehensive presentation of all cost types	Clear allocation of costs to functions
Disadvantages	Can be complex and extensive	Less detailed breakdown of production costs

FAQ

What is the Operating Result in the P&L?

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.

Is the P&L Account active or passive?

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.

Which Accounts are in the P&L?

The P&L contains income and expense accounts.

Are Business Assessment and P&L the same thing?

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.