The profit & loss statement tracks your company’s financial performance over a specified period of time.
Unlike a balance sheet, which shows financial accounts at any given moment, the income statement tracks your company’s financial performance over a specified period of time – the course of a year, for instance.
This document is organised in a straightforward way: you take what you’ve earned (revenue) and subtract what you’ve spent (expenses).
So, to break it down: The top of your P&L statement shows your revenue, which basically means your revenue.
All costs associated with producing the goods sold should be recorded here as Cost of Goods Sold (CoGS).
When you deduct the CoGS from your revenue, you get your gross profit.
Okay, let’s see how this works in practice: Say you start selling shirts.
You manufacture 100 shirts for $12 each at the beginning of the month, which costs $1,200.
By the end of the month, you’ve sold all the shirts for $25 each.
That adds ups to $2,500 – your revenue.
Once you deduct your CoGS ($1,200) from your revenue, the remaining $1,300 would be your gross profit.
Now we have to get your expenses in order.
Expenses include rent, salaries and wages, marketing and insurance.
To operate your shirt business, you rent a small space to make the shirts.
You also need to pay a few employees and maybe buy some Facebook ads to spread the word.
And don’t forget about insurance! Add up these costs to get your total expense – let’s say it comes out to $1,000.
As the final step, subtract the expenses ($1,000) from the gross profit in the revenue column ($1,300).
That’s how you get the net income, which in our case is $300.
Congrats! You’re profitable.
If the net income had worked out to be a negative number, that would mean your business was losing money.
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