Explaining a Profit and Loss Statement

A profit and loss statement is a summary of the financial performance of a business over a period of time – this could be monthly, quarterly, or annually. It reflects your business’s past performance and can help you track how your business is performing. It can highlight where your business is succeeding and where it is struggling.  A profit and loss statement will not show you where your cash is, but rather will help you understand the performance of your business.

Your profit and loss statement will generally be split into two sections: Revenue and expenses.

Revenue – Will include details of all income from your primary business activities (e.g. sale of products and services), revenue from secondary activities (e.g. bank interest), and any other financial gains. The most important section is your total sales as this is the primary income for your business.

Expenses – Includes all your expenditure from primary business activities (e.g. material and labour costs), any secondary costs, and any other losses during the period. The main aspects of expenses you should understand are (1) cost of goods sold, which is the direct cost for labour or material needed to provide your business; and (2) operating expenses, which include any costs which are not directly linked to the production of your goods or services for example, rent