Understanding the P&L Statement Part 1

how to read a profit and loss statement

Simply subtract your direct costs from your revenue and that provides you with gross margin. It’s important to note there’s a difference between cash flow and profit. While cash flow refers to the cash that’s flowing into and out of a company, profit refers to what remains after all of a company’s expenses have been deducted from its revenues.

how to read a profit and loss statement

If you notice the P&L statement, apart from net revenue from operations, ARBL also reports ‘Other Income’ of Rs.45.5 Crs. Note number 18 reproduced below explains what the other income is all about. A business’s cost to continue operating and turning a profit is known as an expense. Some of these expenses may be written off on a tax return if they meet Internal Revenue Service (IRS) guidelines. This method is better suited for larger businesses that want to understand the profitability of their core operations. A single-step statement does not provide a breakdown of expenses by department or gross margin calculations.

Operating Revenue

Net operating income is a crucial aspect of the P&L statement because it is what is leftover after all the expenses have been subtracted from the gross profit. If the net operating income value is negative, then it means https://www.apzomedia.com/bookkeeping-startups-perfect-way-boost-financial-planning/ that your business is at a loss. When your company is at a loss, it suggests that you’re spending a lot on expenses just to stay afloat. If the value is positive, then it means that your business is profitable.

Your gross profit margin is your gross profit divided by your revenue. This number represents the profit you make on each product or service you sell. The profit and loss statement is an important tool for all businesses, but it is especially useful for small businesses. This is because small businesses often have limited resources and need to carefully manage their finances. The profit and loss statement can help small businesses make informed decisions about where to allocate their resources.

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Your net profit deducts all expenses (direct and indirect) from your total revenue. Operating earnings measure how profitable your business is, without taking into account external costs, like interest payments, taxes, depreciation, and amortization. Here we show you how to break down a P&L statement—how each line item interacts and what they mean for your company’s financial performance. Knowing how it all works can help you to better troubleshoot, modify, and plan your daily operations. Underneath revenue on the P&L statement, the Cost of Goods Sold (COGS) is listed.

  • Above, we see that our example company made $90,000 in subscription revenue over the period covered by this statement.
  • Below is an annotated reproduction of Apple’s (AAPL 1.56%) profit and loss statement for its fiscal 2021, which ended Sept. 25, 2021.
  • With Moon Invoice get downloadable profit and loss reports to save time and increase profitability for your business.
  • Another reason to generate a profit and loss report is that it’s useful for filing a tax return with the IRS to assess taxes on the business profits.
  • Of course, revenue is a pretty critical number as it’s what you need to cover your expenses.

Janet Berry-Johnson, CPA, is a freelance writer with over a decade of experience working on both the tax and audit sides of an accounting firm. She’s passionate about helping people make sense of complicated tax and accounting topics. Her work has appeared in Business Insider, Forbes, and The New York Times, and on LendingTree, Credit Karma, and Discover, among others. Operating expenses cover all of the expenses that you incur to keep your doors open, excluding your direct costs that we talked about earlier. Revenue also called the “top line” of the P&L, is the money that you’re bringing in from your sales.

How to analyze a profit and loss statement

This is a category that could balloon to a much bigger expense depending on your design process, how you manage projects, how many employees you have, and what software you use for various tasks. Occasionally we would also donate to other non-profit organizations like affordable housing developers or community groups we worked with. Typically we would budget between $500 and $1000 in this category on an annual basis.

  • There are two main categories of accounts for accountants to use when preparing a profit and loss statement.
  • It could also break out one-time expenses, such as a lawsuit settlement.
  • Sometimes we would mail a thank you card to clients when their projects were completed, or have to send a form or a payment to a government agency.
  • This category will also increase as the firm grows considering you will need new furniture and supplies for each new employee.
  • When planning your next year’s budget, look back at the P&L reports from a few prior years to hopefully catch any of these less frequent expenses.
  • This section covers almost all of the money coming into the company.

It is also used to calculate the Gross Margin Ratio which is found by dividing Gross Margin by Total Revenue. Calculating gross profit margin allows you to compare similar companies to each other and to the industry as a whole to determine relative profitability. A P&L statementsometimes called an income statementis a financial report that shows your business’s revenue, expenses, and net profit or loss over a period of time (usually one month or one quarter). One of the most common mistakes made when reading a P&L is failing to understand the difference between gross profit and net profit. Gross profit is the total revenue minus the cost of goods sold (COGS). This number represents the profit that a company makes from its core products or services before any other expenses are taken into account.


If you do not receive this email, please check your junk email folders and double-check your account to make sure the application was successfully submitted. This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult their own attorney, business advisor, or tax advisor with respect to matters referenced in this post. After Operating Expenses are deducted, you’re left with Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). Lucas Gray is a Senior Account Manager and Business Development Manager at Charrette Venture Group where he helps architects run better business. Lucas has over 17 years experience practicing architecture around the world, including running a small firm in Portland, Oregon.

Some exceptions where it’s acceptable to see a loss is when the company made a strategic investment during one period to decrease costs or increase sales in a later period. It’s important to note that investors should be careful to not confuse earnings/profits bookkeeping for startups with cash flow. It’s possible for a firm to operate profitably without generating cash flow or to generate cash flow without producing profits. A balance sheet considers a specific point in time, while a P&L statement is concerned with a set period of time.