Making Sense Of The Profit And Loss Report

Making Sense Of The Profit & Loss Report

A Profit and Loss report is also called an income statement or a P&L. It gives a synopsis of the story. It summarizes your income and expenses for each income or expense account on your Chart of Accounts so you can tell if you’re operating at a profit or loss. The important thing to remember about an income statement is it represents a period of time. This contrasts with the balance sheet, which represents a single moment in time.

How much money did you make and how much did you spend?

To understand how Profit and Loss reports are set up, think of them as a set of stairs. You start at the top with the total amount of sales and income made during the accounting period. Then you go down one step at a time. At each step you make a deduction for certain costs or other operating expenses. At the bottom of the stairs, after deducting all the expenses, you learn how much the company actually earned or lost during the accounting period. This is called the bottom line.

Imagine a business owner who has designed a new product. They need to set a few milestones and here are the goals:

• Goal #1: Make sales 

The product they designed should be something that will be of value to someone else so they can receive income. That is the first section of the Profit and Loss — the Income/Revenues.

• Goal #2: Sell the product at a price that will pay for the cost to produce it

If it costs $5 to create the product each time, then hopefully they sell it for more than that. This is the next section of the Profit and Loss — the Cost of Goods Sold. This brings us to a gross profit amount, which is derived by subtracting the cost of goods sold from the total income.

• Goal #3: Sell enough of the product to cover the costs of running a business (overhead) 

It costs money to have a business. The expenses they have to pay for, regardless of selling one or 1,000 units of the products or services, are considered overhead. Overhead could be professional fees, payroll, office rent, bank service charges and many more. Net Operating Income shows whether this goal has been accomplished.

• Goal #4: Earn a profit so you can take some money home

Other things can happen like a theft or interest income that are not part of the company’s operations. The overall net income of the business shows whether this business owner has made any money. Then the owner decides whether to take some home or reinvest it in the company’s future.