Understanding your Profit & Loss Statement
A Profit & Loss statement is an essential report for business owners and managers. It measures the profitability of a business by comparing revenue and expense for a selected period. Knowing how to read and interpret the data on this report is fundamental.
The Basics: Profit & Loss, often referred to as P&L, is based on a simple formula:
Sales-Expenses=Profit/Loss
If this yields a positive number, you have netted a profit for the period selected. If it is a negative number you have netted a loss.
Income: Income is based on a sub-formula:
Income-Cost of Goods Sold=Gross Profit
Costs directly attributed with the earning of income, such as inventory, is subtracted
from income to calculate Gross Profit.
Expense: The expense section of the P&L is pretty straight forward. It lists all expense accounts and totals them.
Net Income: Net Operating Income is your income less your expenses. Other Expenses and Other Income are
reserved for expenses and income that may need to be
separate from your operating figures like income tax.
Finally, on the bottom line, is your Net Income/Loss.
