19th Jan 2022

A Beginners Guide to Profit and Loss Reports

Brad Stewart picture

Brad Stewart

Cloud Accountant

It’s a good idea to keep an eye on the overall health of your business finances. A profit and loss report is one way of doing exactly that, so within this blog we’ll give you a beginner’s guide to profit and loss reports.

What is a profit and loss report?

A profit and loss report is a financial statement that summarises the total income and total expenses of a business in a specific period. It’s also known as an income statement.

The goal of a profit and loss report is to measure the profits by deducting the expenses from the income to provide a snapshot of your business’s financial health.

You can generate a report on a weekly, monthly, quarterly, or annual basis.

What does the Profit & Loss report highlight?

The report shows information about the net profit based on your revenues and expenses. It can help you identify ways you can manage your profits by cutting costs and driving revenue.

The P&L report also allows you to investigate revenue and expense trends, cash flow, net income, and overall profitability – to then adjust and allocate future resources and budgets accordingly.

Components of a Profit & Loss report

  • Revenue: This entry represents the net sales or turnover during the accounting period.
  • Cost of Goods Sold: This represents the cost of products and services.
  • Gross Profit: Also known as gross income or gross margin, the gross profit is net revenue minus costs of sales.
  • Operating Expenses: Operating expenses are administrative, general, and selling expenses that are related to running the business for a specific period. This includes expenses such as rental expenditure and payroll.
  • Operating income: This refers to earnings before taxes, depreciation, and interest. You deduct the operating expenses from your gross profit to calculate operating income.
  • Net Profit: The total amount earned after deducting the expenses. To calculate net profit, deduct the total expenses from your gross profit.

How to Calculate Profit

To calculate the net profit (or next loss) of your business, here are a few simple steps as follows:

  • Gross Profit = Revenue minus cost of sales
  • Operating Profit = Gross Profit minus your operating expenses
  • Net Profit before Taxes = Operating Profit minus any other income minus any other expenses
  • Profit for the year = Net Profit before taxes minus tax on profit for the year

Need help with your profit and loss?

Don’t hesitate to reach out! We can help advise, or even put one together for you!