A profit and loss statement or P&L is an account compiled to show gross and net profit or loss, during a specific time period. Profit or loss is equal to your income minus your expenses.
For example—you manufacture widgets and sell them to your customers over the internet. During the month of June, your income was £10,000. The first expense you need to subtract is direct expenses. A direct expense is any cost directly related to the production and sale of your product, such as raw materials, shipping costs and labour for assembling the widgets.
For this example your direct expenses are £4,000. This gives you a gross profit figure of £6,000 or 60% gross profit.
Next you need to remove your operating expenses from your business during the month of June. This can include advertising, accountancy fees, heating, lighting, rent, salaries (not directly related to sale) and more.
For this example, your operating expenses are £4,500. So if we take the income, remove the direct costs and operating costs, this gives you a net profit of £1,500. If your figure is a negative, then you’ve made a loss during this period.
Profit and loss statements show you how much money you’re making or losing in a specific time period, they allow you to compare past performance, and detect any issues with sales margins and expenses.
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