In investment banking, PnL Explained (also called P&L Explain, P&L Attribution or Profit and Loss Explained) is an income statement with commentary that attributes or explains the daily fluctuation in the value of a portfolio of trades to the root causes of the changes.
P&L is the day-over-day change in the value of a portfolio of trades typically calculated using the following formula: PnL = Value today — Value from Prior Day
What Is a Profit and Loss (P&L) Statement?
Profit and loss (P&L) statement refers to a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period, usually a quarter or fiscal year. These records provide information about a company’s ability or inability to generate profit by increasing revenue, reducing costs, or both. P&L statements are often presented on a cash or accrual basis. Company managers and investors use P&L statements to analyze the financial health of a company.
Types of Profit and Loss (P&L) Statements
As noted above, a P&L statement may be prepared in one of two ways. These are the cash method and the accrual method.
The cash method, which is also called the cash accounting method, is only used when cash goes in and out of the business. This is a very simple method that only accounts for cash received or paid. A business records transactions as revenue whenever cash is received and as liabilities whenever cash is used to pay any bills or liabilities. This method is commonly used by smaller companies as well as people who want to manage their personal finances.
The accrual accounting method records revenue as it is earned. This means that a company using the accrual method accounts for money that it expects to receive in the future. For instance, a company that delivers a product or service to its customer records the revenue on its P&L statement, even though it hasn’t yet received payment. Similarly, liabilities are accounted for even when the company hasn’t yet paid for any expenses.
Why are profit and loss (P&L) statements important?
A profit and loss (P&L) statement is one of the three types of financial statements prepared by companies. The other two are the balance sheet and the cash flow statement. The purpose of the P&L statement is to show a company’s revenues and expenditures over a specified period of time, usually over one fiscal year.
Investors and analysts can use this information to assess the profitability of the company, often combining this information with insights from the other two financial statements. For instance, an investor might calculate a company’s return on equity (ROE) by comparing its net income (as shown on the P&L) to its level of shareholder equity (as shown on the balance sheet).
What is the difference between a P&L statement and a balance sheet?
A company’s P&L statement shows its income, expenditures, and profitability over a period of time. The balance sheet, on the other hand, provides a snapshot of its assets and liabilities on a certain date. The balance sheet is typically presented as of the last day of the company’s fiscal year. Investors use the balance sheet to understand the financial strength of the company, comparing the amount and quality of its assets against its liabilities.
- The profit and loss (P&L) statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period.
- The P&L statement is one of three financial statements that every public company issues quarterly and annually, along with the balance sheet and the cash flow statement.
- When used together, the P&L statement, balance sheet, and cash flow statement provide an in-depth look at a company’s overall financial performance.
- Statements are prepared using the cash method or accrual method of accounting.
- It is important to compare P&L statements from different accounting periods, as any changes over time become more meaningful than the numbers themselves.