What is a Profit and Loss Account?

A Profit and Loss Account, often shortened to P&L, is an income and expense statement prepared on either an accruals basis or cash basis, which explained within this course.

A P&L is a financial report that shows a income, sometimes referred to as sales or revenue, costs and expenses over a specific period of time e.g., a month, quarter, year or other period.

Its main purpose is to show whether a business has made a profit (where income exceeds expenses) or incurred a loss (where expenses exceed income) during that time, i.e. the result after expenses are deducted from income.

A P&L is prepared on either a cash basis or accruals basis and these important terms are also explained in this course.

Key Components:

1. Income, Revenue or Sales
   • Total income from selling goods or services.
2. Cost of Sales (COS), sometimes called Cost of Good Sold (COGS)
   • Direct costs of producing the goods sold (e.g., raw materials, direct labour).
3. Gross Profit
   • Sales Revenue minus COS.
4. Operating Expenses
   • Costs not directly tied to production (e.g., rent, salaries, marketing).
5. Operating Profit (or EBIT)
   • Gross profit minus operating expenses. Also known as Earnings Before Interest and Taxes.
6. Other Income/Expenses
   • Income or expenses not related to core operations (e.g., investment income, interest paid).
7. Net Profit (or Net Loss)
   • The final result: revenue minus all expenses. If positive, it’s a net profit; if negative, it’s a net loss.

Example:

Why P&Ls Matter:

• Helps business owners understand financial performance.
• Used by investors and lenders to assess profitability.
• Aids in making informed business decisions.