Economic P&L Versus Accounting P&L

Two different numbers can both be called "P&L" for the same position, and they can disagree substantially. Economic P&L answers "how much richer or poorer did this position actually make me today," marking every position to its current fair market value, including gains and losses nobody has locked in yet. Accounting P&L instead follows whatever accounting rules apply to that position — some assets are held at amortized cost and only show gains when sold, some hedges must be tested for effectiveness before their offsetting moves can be recognized together, and some income accrues on a schedule unrelated to when the market price actually moved.

The gap matters most to traders and risk managers, because a book can look flat or profitable on an accounting basis while quietly bleeding economic value, or vice versa. A trader managing risk in real time cares about economic P&L — it reflects what would happen if positions were closed out right now. A finance department reporting quarterly earnings must follow accounting P&L, because that's what the applicable accounting standard requires, regardless of what's happening to fair value in between reporting dates.

Worked example. A desk holds a bond purchased at par that is now trading 3 points lower due to rate moves, but the bond is classified as held-to-maturity for accounting purposes. Economic P&L shows a mark-to-market loss immediately; accounting P&L shows nothing until the bond is sold or impaired, potentially years apart from when the economic loss actually occurred.