The Profit and Loss Statement, also known as the P&L or Income Statement, shows a company’s financial performance over a specified period. There are two different types of Profit and Loss statements, the single-step, and the multi-step. The single-step P&L simply shows the total revenue and expenses of the business to arrive at the net income. The multi-step P&L has a more in-depth view of the company’s revenue and expenses. In this post we will cover the detailed components of the multi-step Profit and Loss Statement, along with a few ways in which you can interpret the P&L to have a deeper understanding of the financial performance of your business.
Revenue
Revenue is displayed at the top of the Profit and Loss statement and represents the total income from primary business operations such as the sale of goods or services.
COGS
The cost of goods sold, also known as COGS, is the cost directly associated with the goods or services that have been sold. Some examples of COGS include the cost of raw materials or direct labor costs.
Gross Profit
Gross profit is the revenue minus the COGS. This indicates the profit generated from primary business operations.
Operating Expenses
Operating expenses are expenses that are incurred to keep the business running but are not directly associated with the goods or services that have been sold. These can include rent, salaries, advertising, marketing, legal, and accounting expenses.
Operating Profit
Operating profit is calculated by deducting operating expenses from the gross profit.
Other Income and Expenses
Other income and expenses are items not directly related to the core operations of the business. This can include interest income, interest expense, dividends, and gains or losses on the sale of assets.
Income Before Taxes
The income before taxes includes the business profits before incorporating income tax expense.
Income Tax Expense
This is a separate line item on the P&L that shows the amount of income tax paid.
Net Income/Loss
Net Income/Loss is the bottom-line figure on the Profit and Loss Statement. It is calculated by deducting all expenses of the business from all income. A net income indicates that profit was made while a net loss indicates that there were more expenses than income in the business.
Some ways in which you can interpret the Profit and Loss Statement
• Check all revenue and expense sources so that you can determine whether you arrived at the financial goals that you set for your business.
• Compare the P&L from previous periods and review the percentage of change to see trends in revenue, expenses, and profits.
• Check your gross profit margins over time to manage your business production costs.
The Profit and Loss Statement is essential to understand since it provides a thorough overview of a company’s revenue, expenses, and profitability over a specific period. This can help you to make informed financial decisions for your business, leading to its growth and success.
