Leasons for non accountants! What is a profit and loss statement? How to read it!

A profit and loss statement, also known as an income statement or statement of earnings, is a financial statement that summarizes a company's revenues, expenses, and net income or loss over a specific period. It provides insights into a company's financial performance by showing the profitability of its operations.

Here's a guide on how to read a profit and loss statement:

1. Identify the Reporting Period: The profit and loss statement covers a specific period, such as a month, quarter, or year. Note the timeframe being covered to understand the context of the financial data.

2. Revenue: The top section of the statement typically shows the company's total revenues or sales. This represents the amount of money generated from the sale of goods or services. Pay attention to the different revenue sources mentioned, such as product sales, service revenue, or other operating income.

3. Cost of Goods Sold (COGS) or Cost of Services: The next section reveals the direct costs associated with producing goods or delivering services. It includes expenses directly tied to production, such as raw materials, labor costs, and manufacturing expenses. Subtracting COGS from revenue gives you the gross profit.

4. Operating Expenses: The profit and loss statement then presents operating expenses, such as salaries and wages, rent, utilities, marketing costs, and administrative expenses. These expenses are necessary for running the day-to-day operations of the business.

5. Non-Operating Income and Expenses: This section includes income or expenses that are not directly related to the company's core operations. It may include gains or losses from investments, interest income, or interest expenses.

6. Earnings Before Interest and Taxes (EBIT): Subtract the operating expenses and non-operating expenses from the gross profit to calculate the EBIT. This figure represents the company's operating profit or loss before considering interest and taxes.

7. Interest and Taxes: Deduct the interest expenses and taxes from the EBIT to arrive at the net income or loss before extraordinary items.

8. Extraordinary Items: Occasionally, profit and loss statements may include extraordinary items, such as gains or losses from the sale of assets or one-time events. These items are not part of the company's regular operations and are separately disclosed.

9. Net Income or Loss: The bottom line of the profit and loss statement reveals the company's net income or net loss. It represents the amount of profit or loss generated during the reporting period after considering all revenues, expenses, taxes, and extraordinary items.

When reading a profit and loss statement, consider comparing it with previous periods or industry benchmarks to assess trends and performance. Analyzing ratios like gross profit margin (gross profit divided by revenue) and net profit margin (net income divided by revenue) can provide further insights into the company's profitability and financial health.

Remember that a profit and loss statement captures a snapshot of a company's financial performance for a specific period. It's important to review it alongside other financial statements, such as the balance sheet and cash flow statement, to gain a comprehensive understanding of the company's financial position and performance.