A profit and loss statement, often called a P&L or income statement, is like a business scorecard. It shows how much money came in, how much money went out, and whether the company earned a profit or took a loss during a period of time. Students can use it to judge whether a business is winning, losing, or improving.
Entrepreneurs use it to make decisions about pricing, costs, hiring, and growth.
Key Facts
- Revenue is the total money earned from selling goods or services before subtracting costs.
- Gross Profit = Revenue - Cost of Goods Sold
- Operating Profit = Gross Profit - Operating Expenses
- Net Profit = Total Revenue - Total Expenses
- Profit Margin = Net Profit / Revenue × 100%
- A P&L statement covers a period of time, such as one month, one quarter, or one year.
Vocabulary
- Revenue
- Revenue is the total amount of money a business earns from selling products or services before expenses are subtracted.
- Cost of Goods Sold
- Cost of goods sold is the direct cost of producing or buying the products a business sells.
- Gross Profit
- Gross profit is the money left after subtracting the cost of goods sold from revenue.
- Operating Expenses
- Operating expenses are the regular costs of running a business, such as rent, wages, marketing, and utilities.
- Net Profit
- Net profit is the final amount of money left after all expenses are subtracted from revenue.
Common Mistakes to Avoid
- Confusing revenue with profit is wrong because revenue does not show the costs required to earn that money.
- Forgetting cost of goods sold is wrong because it makes gross profit look higher than it really is.
- Mixing personal expenses with business expenses is wrong because it gives a false picture of the company's performance.
- Looking at only one month is wrong because seasonal sales, one-time costs, or unusual events can make the business look stronger or weaker than normal.
Practice Questions
- 1 A student T-shirt business has revenue of 800. What is the gross profit?
- 2 A bakery has revenue of 1,700, and operating expenses of $2,100. What is the net profit and profit margin?
- 3 A business has rising revenue but falling net profit for three months in a row. Explain one possible reason this could happen and what the owner should investigate.