Profit and Loss Report definition
Learn what a profit and loss report is, how to read a P&L statement, and how to create one step by step. Understand revenue, expenses, and net profit to assess business performance effectively.
What Is a Profit and Loss Report?
A profit and loss report, often called a P&L statement or income statement, is a financial report that shows a business’s revenue, expenses, and profit over a specific period.
It reveals whether a company made a profit or a loss by summarizing how much money came in and how much went out.
The report is essential for understanding financial performance, assessing business health, and making informed decisions about pricing, spending, and strategy.
How to Read a Profit and Loss Report
Reading a profit and loss report involves moving from the top to the bottom, starting with total revenue.
Below revenue, the report lists the cost of goods sold (COGS), which is subtracted to calculate gross profit.
Operating expenses such as salaries, rent, utilities, and marketing follow on from this, and subtracting these gives operating profit.
After accounting for interest, taxes, and other non-operating items, the final figure at the bottom is net profit or net loss.
Understanding these sections helps you identify trends, spot inefficiencies, and evaluate how effectively the business converts sales into profit.
How to Do a Profit and Loss Report
To create a profit and loss report, begin by gathering all revenue records for the chosen period. List total revenue at the top.
Then record the cost of goods sold and subtract it from revenue to find gross profit. Next, add all operating expenses, including wages, rent, utilities, insurance, and administrative costs.
Subtract these from gross profit to determine operating profit. Finally, include any interest, taxes, or other non-operating income or expenses to arrive at the net profit or loss.
The completed report provides a clear summary of financial performance and helps guide budgeting, forecasting, and decision-making.
