Business Finance 101 – What is a Profit & Loss Statement and what it tells us


Business Finance 101 – What is a Profit & Loss Statement and what it tells us
What is a Profit & Loss Statement and what it tells us

Want to know what is a Profit and Loss Statement? It is one of the main business reports we use, and what it tells us is how the business is going financially (whether you are making a profit or loss for a period) – it is the Profit & Loss Statement or Income Statement or Trading Statement. The statement shows all the sales for a period less the cost of goods (if you sell product) which leaves Gross Profit, then from that all the Expenses (operating or overheads like rent, wages etc) leaves  the Operating Profit (not always reported), then from that less any non-regular income and expenses, gives us the final Net Profit.

bus-profit-loss-diagram

In summary, there are three main levels of profit or profit margins

  • Gross profit (after cost of sales deducted from sales/revenue),
  • Operating profit (sometimes given = after expenses deducted) also known as Pretax profit (before tax and other non-regular items) and
  • Net profit (Final, after tax and other non-regular expenses and income).

Note that “profit”, “earnings” and even “income” are all used interchangeably, and mean the same thing.

When the term “margin” is stated, it can apply to the dollar number for a given profit level and/or the number as a percentage of sales/revenues.

The absolute amount, the dollar amount, is on the Profit & Loss Statement. The net profit margin commonly uses the percentage calculation to provide a measure of a company’s profitability on a historical basis (3-5 years) and in comparison to peer companies and industry benchmarks. The margin is the amount of profit (at the gross, operating, pretax or net level) as a percent of the sales generated.

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