How to Read and Understand a Profit and Loss Statement (2024)

FAQs

How to Read and Understand a Profit and Loss Statement? ›

The report is divided into two sections: income and expenses. Your total revenue is listed under the income section, while your total expenses are listed under the expenses section. To calculate your net profit or loss, simply subtract your total expenses from your total revenue.

The report is divided into two sections: income and expenses. Your total revenue is listed under the income section, while your total expenses are listed under the expenses section. To calculate your net profit or loss, simply subtract your total expenses from your total revenue.

The profit is the amount gained by selling an article at a price greater than its cost price. In contrast, the loss is the amount lost by selling an article for less than its cost price.

The Bottom Line

A P&L statement summarizes the revenues, costs, and expenses of a company during a specific period. It is one of three financial statements that public companies issue quarterly and annually—the other two are a balance sheet and a cash flow statement.

Assets are on the top of a balance sheet, and below them are the company's liabilities, and below that is shareholders' equity. A balance sheet is also always in balance, where the value of the assets equals the combined value of the liabilities and shareholders' equity.

You want to see your profit positive (also known as “in the black”) in most cases. 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.

While the P&L statement gives us information about the company's profitability, the balance sheet gives us information about the assets, liabilities, and shareholders equity. The P&L statement, as you understood, discusses the profitability for the financial year under consideration.

On a P&L statement, revenues are listed on the left side, with costs subtracted on the right side (expenses). The statement shows an overview of the company's financial performance over a set period, including the amount of profit (or loss) the company made.

A profit and loss (or income) statement lists your sales and expenses. It tells you how much profit you're making, or how much you're losing. You usually complete a profit and loss statement every month, quarter or year.

The value displayed after subtracting the cost of goods sold from the revenue is your company's gross profit. The expenses section shows how much money you spent throughout a specified period of time. The next value on the P&L statement is the net operating income which is the gross profit minus the total expenses.

How do you read a profit and loss diagram? ›

Anything on the Y axis above the X axis represents a gain. Anything on the Y axis below the X axis represents a loss. The X axis represents the price of the underlying (stock, index or whatever other investment we are analyzing).

A profit and loss statement is calculated by taking a company's total revenue and subtracting the total expenses, including tax. If the resulting figure – known as net income – is negative, the company has made a loss, and if it is positive, the company has made a profit.

A balance sheet tells you everything your business is holding on to at a particular point in time—your assets and liabilities. The balance sheet tells you where you are, while the income statement tells you how you got there. A cash flow statement tells you how much cash you have on hand and where it came from.