Bookkeeping 101: Understanding the Basics of Profit and Loss Statements

Ellen Moore
Mar 19
1 min read

A Profit and Loss Statement (P&L)—also called an Income Statement—is a financial report that shows a business’s revenue, expenses, and net profit over a specific period. It helps business owners track financial performance and make informed decisions.

🔍 Breaking Down a P&L Statement

1️⃣ Revenue (Sales)

The total income generated from selling goods or services.
Example: Product sales, service fees, rental income.

2️⃣ Cost of Goods Sold (COGS)

Direct costs of producing goods or services.
Example: Raw materials, labor costs, manufacturing expenses.

3️⃣ Gross Profit (Revenue - COGS)

The profit made after deducting direct costs but before operating expenses.

4️⃣ Operating Expenses

Indirect costs of running a business.
Examples: Rent, utilities, marketing, salaries, insurance.

5️⃣ Operating Profit (Gross Profit - Operating Expenses)

Measures the profit from core business operations.

6️⃣ Other Income & Expenses

Includes interest, investments, and one-time gains/losses.

7️⃣ Net Profit (Bottom Line) (Operating Profit - Other Expenses - Taxes)

The final profit after all expenses, showing the business’s true profitability.

📊 How to Use a P&L to Track Business Health

✅ Monitor Profitability – Compare revenue vs. expenses to ensure the business is making money. ✅ Identify Cost Trends – Find areas where you can cut unnecessary expenses. ✅ Set Goals & Forecast – Use historical data to plan for growth and future financial strategies. ✅ Make Tax Preparation Easier – A well-maintained P&L simplifies tax filing. ✅ Attract Investors & Lenders – A strong P&L demonstrates business stability.