A Statement of Profit or Loss (also known as a Profit and Loss Account or Income Statement) is a financial report that summarizes a business's revenues, costs, and expenses over a specific period. It shows whether the business made a profit or a loss during that period.
Key Components of a Statement of Profit or Loss
A statement of profit or loss typically includes the following components:
Revenue/Sales: The income generated from the sale of goods or services.
Cost of Goods Sold (COGS): The direct costs associated with producing the goods sold.
Gross Profit: Revenue minus COGS.
Operating Expenses: Costs incurred in running the business (e.g., salaries, rent, utilities, marketing).
Operating Profit (EBIT): Gross profit minus operating expenses. EBIT stands for Earnings Before Interest and Taxes.
Interest Expense: The cost of borrowing money.
Profit Before Tax (PBT): Operating profit minus interest expense.
Tax Expense: The amount of income tax payable.
Net Profit (or Net Loss): Profit before tax minus tax expense. This is the final profit or loss for the period.
Example Statement of Profit or Loss
Here's a simple example of a statement of profit or loss for a business:
Item
Amount (£)
Revenue/Sales
$100,000
Cost of Goods Sold
$40,000
Gross Profit
$60,000
Operating Expenses
$25,000
Operating Profit (EBIT)
$35,000
Interest Expense
$2,000
Profit Before Tax (PBT)
$33,000
Tax Expense
$8,250
Net Profit
$24,750
Using Statements of Profit or Loss for Decision Making
Businesses use statements of profit or loss to make various decisions, including:
Assess Profitability: Determine if the business is making a profit or a loss.
Identify Areas for Improvement: Analyze expenses to find areas where costs can be reduced.
Compare Performance Over Time: Compare statements of profit or loss from different periods to identify trends and changes in profitability.
Evaluate Pricing Strategies: Assess whether the prices charged are sufficient to cover costs and generate a profit.
Make Investment Decisions: Provide information for potential investors to assess the financial health of the business.
Calculating Profit/Loss
The basic formula for calculating profit or loss is:
Total Expenses include Cost of Goods Sold and Operating Expenses.
Suggested diagram: A simple flowchart showing the flow from Revenue to Net Profit/Loss, highlighting the intermediate steps of Gross Profit and Operating Profit.