About profit and loss statements
P&L statements, or income statements, show your business’ financial performance in a particular period of time.
It tracks how your business is doing and can help explain changes, for example why profit is down even though revenue is steady.
The key equation on profit and loss statements is: net income = revenues – expenses.
Master your profit and loss statement
Transcript
Descriptive Transcript: Profit and Loss Statement
[00:00:01]
[A man sits at table, looking at the laptop in front of him. There is a blue filter over the whole image with the title of the video, ‘The profit and loss statement’, on the left hand side of the screen.]
[Light upbeat music plays in the background.]
[00:00:04]
[The screen cuts to the presenter speaking directly to the camera in a clear, friendly tone. He is sitting at a table on an open-plan office.]
Presenter: 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.
[00:00:27]
[Screen zooms out and as the presenter speaks, the three parts of the statement are listed on the left hand side of the screen. ]
Presenter: Revenues, expenses and profits.
[00:00:31]
[Screen cuts to a sample profit and loss statement using an example business]
Presenter (voiceover): 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.
[00:00:42-00:00:58]
[screen cuts to footage of a man and woman, sitting at a table in an office, looking at a profit and loss statement on a laptop and talking to one another. Presenter continue to talk via voiceover.]
Presenter (voiceover): “…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.
[00:00:59]
[screen cuts back to a close up of the presenter, who is still sitting at table in open-plan office.]
Presenter: This comes from assets in your business losing value over time.
[00:01:01]
[screen cuts to two man reviewing document on laptop, talking to one another…
Presenter (voiceover): For instance, if you bought a truck today to help supply your goods,
[00:01:06]
[Screen cuts to close up on laptop keyboard and man using computer mouse]
Presenter (voiceover): It's going to be worth a lot less in five years’ time.
[00:01:11]
[screen cuts to another close up of the two men talking]
Presenter (voiceover): And you have the inevitable taxes.
[00:01:12]
[screen cuts to close up of man’s hand using track pad on laptop.]
Presenter (voiceover): Finally, your profits.
[00:01:12]
[screen cuts back to a more zoomed out shot of the two men discussing the document on the laptop screen.]
Presenter (voiceover): Gross profit is found here. The higher your gross profit,
[00:01:16]
[screen cuts to close up of presenter, from shoulder height, speaking directly to the camera.]
Presenter: the more money your business has to cover operating expenses and other expenses.
[00:01:18]
[screen cuts to a profit and loss statement, showing the expenses section.]
Presenter (voiceover): 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.
[00:01:27]
[screen cuts to clos up side profile of man, resting his hand on his chin
Presenter (voiceover): This is the quickest indicator of the health of your business.
[00:01:30]
[screen cuts back to presenter, speaking directly to camera.]
Presenter: Learn how each dollar entering your business makes its way all the way down to the bottom line by exploring the strategic finance resources…
[00:01:40]
[Screen cuts to blue solid background with the business.govt.nz logo in the centre of the screen]
Presenter (voiceover): …on business.govt.nz.
[00:01:45]
[screen fades to end with music concluding. ]
Revenues
Revenues is the money your business earns from all sources before you pay expenses, taxes and other bills. If your business makes money in different ways, each gets its own line in the revenues section.
The goal in business is always to have money coming in, showing as positive number in the revenue section. But if your expenses are higher than your revenues, you’ll end up with a net loss.
Unlike cash flow statements, which only record cash, revenues on profit and loss statements include those received in cash and those sold on credit. On balance sheets, these are classed as current assets or accounts receivable.
Expenses
The expenses part of the income statement lists all the things that your business has spent money on. Some of the terms only apply to some businesses, so don’t worry if your income statement doesn’t show all of them.
You will find these types of expenses on an income statement.
Cost of goods sold (COGS)
COGS, also called cost of sales, is the amount of money it takes to make the product or service you’re selling – how much you spend on materials, labour, and expenses. It can also take into account your stock at the beginning and end of a year.
Talk with an advisor about how your business can measure and record stock levels. The cost of goods sold is used to calculate your gross profit and contribution margins.
Costs of goods sold on a profit and loss statement include opening and closing inventories. On a balance sheet, these are a current asset. Include goods you buy to sell to customers. If bought on credit, they are also a current liability (accounts payable) on the balance sheet.
Operating expenses
These are also called operating costs or overheads. They are the cost of running your business, including rent, marketing and taxes. Many statements include depreciation and amortisation. Give each expense its own line under operating expenses.
This makes it easier to:
- see changes over time and spot trends
- get clues about how to cut costs
- track the effect of changes you make.
If you pay any of these costs in cash, you’ll see it on the cash flow statement. If paying on credit, these are a liability (accounts payable) on the balance sheet.
Bills to pay
These costs will also appear on other financial statements. Accounts payable (liability) and pre-paid expenses (asset) are on the balance sheet. Changes are recorded in the cash flow statement under operating cash flow.
Vehicle loans
This is paid over the time period. The balance sheet records the total amount borrowed as a liability and the vehicle as an asset. The cash flow statement records loan repayments under financing activities.
Operating profit
This is also called EBIT (earnings before paying interest and tax). It’s the money you make from carrying out your core business, after you’ve covered operating expenses.
If your operating profit is positive, your business is selling products or services for more than it costs to make them and run the business. If it’s negative, your business isn’t earning enough to cover costs.
Gross and net profit
Gross profit is also called gross margin. The higher your gross profit, the more money your business has to cover operating expenses and earn net profit. Your gross profit is your revenues minus costs of goods sold. It should be a positive number.
This is how it’s calculated:
Gross profit = total revenues - cost of goods sold.
If your income statement shows negative gross profit, it might be because:
- your costs of goods sold are too high
- your prices are too low
- there’s a mistake in your final stocktake or your accounting.
- Net profit is also called profit after income tax. It’s the money your business makes minus all its expenses. It’s the quickest indicator of the health of your business.
This is how it’s calculated:
Net profit = income – (cost of goods sold + operating costs + interest + tax + depreciation + amortisation).
A positive net profit shows your business makes more than enough money to cover costs. This is also called net income. If your net profit falls below zero, you’re spending more than you’re earning.
Learn more about