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The profit and loss statement, also known as the income statement, tracks the financial performance of a business over a given period of time.
It includes all sources of profit and loss, which are relevant to the business for that period. This includes items which are not shown in the cash flow statement, such as vehicles and machinery losing value over time.
The income statement consists of three parts:
First up is your revenue. This is the money your business earns from all sources, before you pay expenses, taxes and other bills.
Your expenses - this is the money that you spent. Here you can see the cost of goods sold, also called cost of sales. It's the amount of money which it takes to make the product or service you're selling.
There are also operating expenses, sometimes called overheads, which are the costs of running your business, such as rent, marketing and so on.
Then you have depreciation. This comes from assets in your business losing value over time. For instance, if you bought a truck today to help supply your goods, it's going to be worth a lot less in five years time. And you have the inevitable taxes.
Finally, your profits. Gross profit is found here. The higher your gross profit, the more money your business has to cover operating expenses and other expenses. Net profit is on this statement too and is sometimes called the bottom line.
This is the money your business makes, minus all its expenses, including tax. This is the quickest indicator of the health of your business.
Learn how each dollar entering your business makes its way all the way down to the bottom line, by exploring the strategic finance resources on business.govt.nz