Are you a business owner new to the accounting world struggling to figure out the difference between different financial statements? Many startup founders and business owners initially face this challenge . However, once they learn to distinguish these statements, they gain a clearer understanding of their company’s financials and can make more informed business decisions.
AICPA suggests it’s absolutely vital for the success of small businesses and startups as regular financial reporting can help them avoid unexpected surprises and correct their course promptly. This is especially important when almost 20% of startups fail to achieve success during their first two operational years.
To avoid this fate, as a business owner, you need to know where your money’s coming from and where it’s going. Financial statements are the best way to get this insight. But if you’re confused about the income statement and profit and loss statement or terms, you’re not alone. In this piece, we’ll clear it up for you and also help you understand how these are similar or different from other key financial statements, namely the balance sheet and cash flow statement. Read along.
What’s the difference between an income statement and a P&L?
Here’s the simple truth: an income statement and a P&L or profit and loss statement are the same thing. Both terms refer to the same document. Some people also call it a “statement of operations” or “statement of revenue and expense,” but these are less common terms. In practice, whether you say income statement or P&L, you’re talking about the same report.
Now that we’ve got that sorted, it’s time to understand what this document shows you.
What is the income (P&L) statement?
The income statement or P&L statement is one of the most important financial tools your business has. It gives a clear summary of how much money your business made and spent during a specific period, whether that’s monthly, quarterly, or annually. This report is essential for understanding your company’s profitability and financial health. Without it, it’s nearly impossible to get a complete picture of how well your business is doing.
At the core of an income statement is a simple formula:
Income = (Total Revenue + Gains) – (Total Expenses + Losses)
Let’s break that down:
Revenue
Revenue is the money your business generates from core activities, primarily sales. This could be from selling products, providing services, or any other primary business activity that drives your income.
Gains
These are profits that come from activities outside your regular business operations, like selling an asset for more than its book value.
Expenses
These are the costs needed to generate that revenue; things like rent, salaries, utilities, etc.
Losses
They are the opposite of gains. They occur when your business sells an asset (like property or equipment) for less than what it was originally worth on the books.
For example, imagine your business generates $500,000 in revenue during the year. However, your total expenses amount to $450,000. These expenses include your rent, salaries, utilities, marketing costs, and the cost of producing your goods or services.
This leaves you with a net income of $50,000 for the period. The income statement shows you clearly that, after accounting for all your revenue and expenses, you made a profit.
However, if your expenses had exceeded your revenue, let’s say your expenses were $550,000, the result would be a net loss of $50,000. In this case, your business wouldn’t be making a profit, and the income statement would reflect that as a loss for the period.
By looking at this document, you can determine whether your business is operating profitably or if you need to take action to reduce costs or increase revenue. The income statement provides a clear and comprehensive view of how well your business is performing financially during a specific period.
With a clear understanding of what an income/P&L statement is, it’s important to see how it compares to other financial statements you’ll encounter.
Income or P&L statement vs. other financial statements
While your income statement (P&L) is critical, it’s only one part of your financial picture. Let’s look at how it compares to other key reports: the balance sheet and the cash flow statement.
Income statement vs. balance sheet
The income statement shows whether you made a profit or loss over a set period. The balance sheet, however, is a snapshot of your business’s financial position at a specific point in time. It tells you what you own (assets), what you owe (liabilities), and what’s left for the owners (equity).
Both documents are vital, but they serve different purposes. The income statement shows how your business is performing over a period of time. The balance sheet shows what your business owns and owes at any given moment.
Income statement vs. cash flow statement
The income statement tracks profits and losses, but the cash flow statement focuses on cash. This statement shows you where your money is coming from and where it’s going. It accounts for the timing of cash inflows and outflows, like customer payments or late bills.
Your income statement includes all revenue and expenses, whether or not you’ve received or spent the cash. The cash flow statement, on the other hand, tracks cash in real time. If your customers are late with payments, your cash flow statement will show you how that affects your business.
Having explored these relationships, let’s now understand why keeping your income statements updated is critical.
Why an updated and accurate income statement matters
You need to keep your income statement accurate and up-to-date. Without it, you won’t know where you stand financially. These statements show your revenues, cost of goods sold (COGS), and operating profit. When you dive into your profit and loss (P&L) statement, you’ll spot trends that impact your bottom line.
For example, if you’re tracking gross profit, you can see how well you’re managing production costs compared to sales. If COGS rises without a matching increase in revenue, or if you notice rising operating expenses without corresponding revenue growth, it’s time to address potential inefficiencies. Regular financial reports help you stay on top of these metrics and make informed decisions on income and expenses.
Accurate income statements also prepare you for tax season. The IRS expects precise records to avoid penalties. Not only that, you can also get taxation benefits through accurate financial reporting, especially in cases where you’re incurring losses.
Besides, investors also rely heavily on your income statement to gauge your business’s profitability. In fact, 73% of investors base funding decisions on the accuracy of a company’s income statement. If your data is outdated or inaccurate, you risk missing out on opportunities or making costly mistakes.
How Synder can improve your income statements
Managing your income statement doesn’t have to be complicated. Synder is an accounting automation tool that makes syncing and recording sales data simple. It connects your ecommerce platforms and payment channels with your accounting system, so you get accurate, up-to-date information every time.
With Synder, you can automate the entire process. It syncs sales data from over 30 platforms, including QuickBooks Online/Desktop, Xero, and Sage, ensuring your income statement reflects your true financial position. No more manual data entry or worrying about mistakes.
More than 5,000 businesses rely on Synder every day to keep their financials accurate and streamlined. If you want to avoid errors and save time, Synder can help. Sign up for a 15-day free trial or join our Weekly Public Demo to learn how to boost your business flows.
Final thoughts
In short, an income statement and P&L are basically two names of the same financial statement, and understanding the difference between an income statement and other key financial statements can help you take control of your financial health.
The income statement can give you important insights about your profitability and losses and help you make data-driven decisions. However, that’s just one piece of the puzzle. By combining it with a balance sheet and cash flow statement, you can get a full picture of your business’s financial standing.
And to make the most of your financial data, it’s crucial to keep all your statements updated and be regular with your financial reporting. With Synder, you can automate the process and make sure you always have accurate, real-time information at your fingertips, without the hassle of manual updates.
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