The Income Statement (P&L) Explained

The income statement — profit and loss statement, P&L, pelno (nuostolių) ataskaita — reports performance over a period: what the company earned, what it consumed earning it, and what was left. Where the balance sheet is a photograph taken at a date, the P&L is the film between two photographs.

That difference is the whole point. A balance sheet tells you the company holds 6,200 € in cash; the P&L tells you whether the year that produced it was any good.

What the statement actually contains

Two kinds of line, and nothing else:

• Income — revenue earned in the period: goods sold, services delivered, plus incidental items like interest received.
• Expenses — resources consumed in the period: the cost of what was sold, salaries, rent, depreciation, interest, tax.

Both are period accounts (classes 5 and 6 in the Lithuanian chart of accounts). They start every financial year at zero, accumulate through the year, and are swept into equity at year end by closing entries. That is why the P&L never appears on the balance sheet as such — only its bottom line does, as the year's result inside equity (see retained earnings).

Crucially, income and expenses are recognized when earned and incurred, not when cash moves. An invoice issued in December is December revenue even if it's paid in February; a December salary is a December expense even if paid in January. That is accrual accounting, and it is what makes the statement comparable period to period — see adjusting entries for how the cut-off is enforced.

A worked example

A small EU services-and-goods company, full year, in euros:

	Amount
Sales revenue	180,000
Cost of sales	−104,000
Gross profit	76,000
Selling expenses	−21,000
Administrative expenses	−43,800
Operating profit	11,200
Other operating income	900
Other operating expenses	−300
Financial income	100
Financial expenses (loan interest)	−700
Profit before tax	11,200
Corporate income tax	−1,800
Net profit	9,400

Read it as a funnel: 180,000 € came in the top, three layers of cost were removed, 9,400 € came out the bottom. Each subtotal answers a different question, which is why all three exist — the distinction is worked through in Gross Profit vs Operating Profit vs Net Profit.

Note what the tax line is not: 17% of 11,200 would be 1,904. Tax is computed on taxable profit, which differs from accounting profit through non-deductible expenses, reliefs and timing differences. The two figures agreeing exactly would be the surprise.

Line by line

Sales revenue is what the company invoiced for its normal activity, net of VAT and net of credit notes. VAT never appears in the P&L at all — it is collected on behalf of the state and sits as a liability on the balance sheet.

Cost of sales is the cost of the specific goods and services that produced this period's revenue — purchase or production cost of goods sold (see FIFO and inventory valuation for how that cost is measured), direct labour, direct production overheads. Matching matters here: stock bought but not yet sold is an asset, not an expense.

Selling and administrative expenses are period costs — they attach to the calendar rather than to units sold. Salaries, rent, software, marketing, depreciation, professional fees.

Other operating income and expenses catch what belongs to the business but not to the main trade: a gain on selling a used vehicle, a write-off of a bad debt, an FX difference on a trade receivable.

Financial income and expenses are the cost and yield of financing — loan interest paid, interest earned on deposits. They are separated deliberately, so a reader can see performance before the effects of how the company is funded.

Corporate income tax is the period's tax charge. In Lithuania the rate is 17% with reliefs for small and newly formed companies, but the charge is computed on the tax base, not on the accounting result.

Formats: by nature or by function

The example above is presented by function — costs grouped by what they were for (cost of sales, selling, administration). The alternative is by nature — costs grouped by what they are (raw materials, employee benefits, depreciation, other). The EU Accounting Directive (2013/34/EU) permits both, and national law decides which layouts a company may use for its size category.

By-function is more useful for management (it gives you a gross margin); by-nature is easier to produce (it maps straight to expense accounts without allocation). Neither changes the bottom line.

How the statement is derived

Nothing in the P&L is entered directly. Every line is a sum of postings to income and expense accounts, which arrive automatically from documents: issuing a sales invoice credits revenue, registering a purchase invoice debits an expense, running payroll debits salary expense, and the revenue recognition engine releases deferred income into revenue as it is earned.

In Nordlet, POST /v1/reports/financial-statements { fromDate, toDate, category } returns the P&L alongside the balance sheet, in the layout for the company's size category. The subtotals above are computed by mapping chart classes: sales revenue from account group 50, cost of sales from 60, selling expenses from 61, administrative from 62, financial from 53/58 and 68, income tax from 69. Because the mapping is by account code, a heavily customized chart is worth checking once against the statement before relying on it.

For the same statement across a group of companies, the consolidation guide covers combining member P&Ls with FX translation and eliminations.

Reading one properly

• Compare periods, never a single column. One P&L tells you almost nothing; the same P&L beside last year tells you the story. Revenue up 8% with cost of sales up 15% is a margin problem no absolute number reveals.
• Watch the margin ladder. Gross 42.2%, operating 6.2%, net 5.2% in the example above. Which margin moved is the diagnosis: gross means pricing or input costs, operating means overheads, net means financing or tax.
• Profit is not cash. The example company earned 9,400 € and its bank balance rose by 1,300 €. Both are true. The reconciliation between them is the cash flow statement.
• Check the tail. Large "other" balances usually mean something was booked where nobody had to explain it.

FAQ

What is the difference between an income statement and a balance sheet?

The income statement covers a period and reports performance — income minus expenses. The balance sheet describes a single date and reports position — assets, liabilities and equity. They connect at one point: the period's net result is added to equity on the balance sheet.

Is the income statement the same as the profit and loss statement?

Yes. "Income statement", "profit and loss statement", "P&L" and "statement of profit or loss" all name the same statement; usage varies by country and framework rather than by content.

Does revenue in the income statement include VAT?

No. Revenue is reported net of VAT. VAT charged to customers is never income — it is collected for the state and appears on the balance sheet as a liability until it is paid over.

Why doesn't net profit equal the increase in the bank balance?

Because profit is measured on the accrual basis and cash is not. Unpaid customer invoices raise profit without raising cash, inventory purchases consume cash without reducing profit, and depreciation reduces profit without touching cash. The cash flow statement exists precisely to reconcile the two.

What is a good net margin?

There is no universal figure — a grocery chain and a software company have no business being compared. The useful benchmarks are your own prior periods and direct competitors in the same trade; a stable or improving margin matters far more than its absolute level.