If you have come across the term “Profit & Loss Statement” or maybe you’ve seen the abbreviation “P & L” and you are wondering what could have been the possible meaning of the acronym or the statement in general, here is a detailed guide on what Profit and Loss Statement is, how to use it; when to use it, sub-terms included, and literally everything you need to know about this as an entrepreneur.
You may have started your business out of your passion for it or you saw a friend doing well in the business and boom, you jumped into the business line without considering accounting as a necessity for that business. But believe me, if you don’t have any aspect of accounting, you need to learn this particular one called “Profit and Loss Statement”. It will help your business to stay strong.
I can remember being in the midst of newbies entrepreneur some years back and we were discussing this particular topic “Profit and Loss Statement”. One of them said that he doesn’t see the need in generating the statement that it’s somehow strenuous: But after I explained everything to him, he was marveled at what he learned that he didn’t know before. Yes, some of us reading this might just be like him, but in whatever way, you have to stay calm and read through this article.
- 5 Ways to Manage Your Budget as a Business Owner
- 5 Ways to Improve Your Budgeting and Forecasting Techniques
- 3 Valuable Tips for Managing Business Finances in the UK
What is Profit & Loss Statement
Table of Contents
Abbreviated as P&L, the profit and loss statement is a financial statement that encapsulates the income, costs, and expenses realized during a business period. It may contain the business 1 week, 1 month, 3 months, 6 months, or even 1-year income and expense depending on how the business owner wants it to be done.
The record will help the business owner and managers to know if they are going forward or their business is deteriorating to the worst side. It will importantly help the entrepreneur to know his/her business incurred profit and loss.
Not only does the entrepreneur knows the loss incurred, but the Profit and loss statement will also have a clear record of why the business is not able to create more profits by reducing cost or increasing revenue.
In a nutshell, the P & L Statement will help the business owners to understand changes in the business accounts over a set period of time.
Understanding the Profit and Loss Statement Sheet
The sheet is prepared in an orderly manner so as to relieve you from much stress.
However, the first thing you will on the P&L sheet is income or revenue which is usually broken down into diverse categories based on your offered products or services.
After that, you will have the expenses category which will help you to keep a record of expenses you made each day with regards to the “business operation, marketing, labor, taxes, insurance, and other incurred expenses.
Upon noting the cost of all these, you will then be able to derive your profit or loss amount.
- The Four Most Important Hard Skills Every Manager Needs
- What A Taxify (Bolt) Driver Taught Me About Running A Successful Business
- Five Cost-Effective Ways To Test New E-commerce Product Ideas
- Dropshipping Vs Affiliate Marketing: What Is The Difference?
Acronyms and Profession Terms Found in the P&L Sheets and their Meaning
1. COGS or COS
This is an acronym that stands for Cost of Goods Sold.
So, wherever you see any of these acronyms in a balance or P&L statement sheet, just know that it represents “Cost of goods”
2. Gross Profit
This is a professional accounting term that is referred to as the gain realized in the business after subtracting the costs of all sold goods from the total sales amount.
4. Net Profit
Referred to the actual amount of money the business makes after subtracting the GROSS PROFIT from other incurred expenses.
Calculating this, you will see how much money your business actually makes.