Profit and loss account (P&L)

Definition and legal basis

The income statement is a key accounting tool and is defined in Section 275 of the German Commercial Code (HGB). It shows the income and expenses of a company for a specific period and determines the annual result. The HGB legally obliges merchants to prepare a P&L statement as part of the annual financial statements. The statement can be prepared according to the total or cost of sales method. It forms the basis for taxation and the distribution of profits to shareholders. The income statement distinguishes between operating, financial and extraordinary results. It enables a detailed analysis of a company’s earnings situation. The structure follows legal requirements and provides a standardized overview of the company’s finances.

Structure and classification of the income statement

The income statement is divided into different profit levels and profit components. The cost of sales method shows expenses according to their economic origin, while the total cost method differentiates costs according to their nature. The first earnings level shows the gross profit by comparing sales revenue and cost of sales. Operating profit takes into account other operating income and expenses. The financial result includes income and expenses from financial assets and securities. The result from ordinary activities integrates operating and financial components. Extraordinary income and expenses are reported separately. The closing item is the net profit or loss for the year.

Functions and meaning

The income statement fulfills several key functions for companies and stakeholders. It provides transparency and documentation of the company’s earnings. Investors, creditors and shareholders can assess the economic performance of a company. The income statement enables an analysis of the earnings situation and cost structure. It forms the basis for key business figures such as return on sales or gross profit margin. For tax consultants and auditors, it is a central instrument for analyzing annual financial statements. The statement supports management decisions by providing detailed insights into the company’s success.

Legal and tax aspects

The preparation of the income statement is subject to extensive legal and tax regulations. The German Commercial Code defines classification rules and valuation principles. There are differences in the determination of results between the commercial balance sheet and the tax balance sheet. Tax regulations may deviate from commercial accounting rules. Companies must comply with generally accepted accounting principles. The documentation must be comprehensible and precise. Auditors monitor compliance with accounting regulations.

International accounting standards

International accounting standards such as IFRS and US GAAP are becoming increasingly important. They aim to harmonize accounting standards globally. Listed companies often have to prepare their accounts in accordance with these standards. The differences to German accounting standards are considerable. IFRS places more emphasis on market values and future prospects. Multinational companies must be proficient in both accounting systems. The harmonization of the standards promotes the international comparability of company data.