Understanding Your P&L Statement Part 1

What’s a profit and loss statement?

A Profit and Loss statement, often referred to as a P&L statement, is an income statement that is one of the key financial statements for your company. It indicates how your revenue is transformed into the net income or net profit (or loss).  Here’s a list of key elements in your P&L to pay attention to to determine your business’ growth:

  • Revenue (sales) is the amount realized by a business from the sale of goods or rendering of services. There are different kinds of revenues your company should measure
    • Gross revenue: all receipts and billings from the sale of goods and services. However, this does not include any subscriptions for sales returns or allowances.
    • Net Sales Revenue: subtracts sales returns and allowances from the gross sales revenue figure. This figure better represents how much cash your business receives from your customers.
  • Cost of Goods Sold or COGS is the accumulated total of all costs used to create a product or service (i.e. direct labor, materials, and overhead), which has been sold.
  • Gross Profit is calculated by subtracting your COGs from your Net Sales. Its presented on a multiple-step income statement prior to deducting selling, general and administrative expenses and prior to non-operating revenues, non-operating expenses, gains and losses.
  • Selling, General and Administrative, referred to as SG&A, are operating expenses incurred to promote, sell, and deliver a company’s products and services, and manage the overall company; reported on the income statement in the period in which the expenses occur.
  • Depreciation & Amortization Expenses is used to account for decreasing value of assets over time.
    • Amortization occurs when the depreciation of an intangible asset is split up over time, and depreciation occurs when a fixed asset loses value over time.

Keep these key terms and an example of a P&L statement close by downloading the handout below. Want more finance talk? Visit our other resource on operating income here.

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