Accounting For Beginners - All You Need To Know About Profit And Loss

Understanding whether a business is profitable or not is fundamental to the success of the business. If you are a business owner, you need to know what to do to maximise your profits or whether there are areas that need more attention. This is why regularly creatin and understanding your Profit and Loss (P&L) is so important.

What is a profit and loss statement?

A profit and loss statement can also be known as an income statement. It is a summary of all the sales made over a prescribed period of time, minus any expenses.

What is the purpose of a profit and loss statement?

Profit and loss statements help you to understand how a business is performing financially as it shows how much money a business has after expenses have been deducted from the income. By comparing profit and loss statements from previous periods, you can spot trends in demand or in spending.

Remember that ‘spending’ can mean money that has physically been paid out as well as commitments that have been made. For example, when you receive an invoice, it is considered as spending as the cost has been incurred even if you do not pay the invoice for another 30 days.

HB Accountants Top Tip!

When you review your profit and loss statement, look at the gross and net profit separately. This will help you identify processes or areas where you can change how you operate

Gross profit is the business income minus the direct cost of sales.

Net profit is your business income minus the direct cost of sales and expenses.

By structuring your statement this way, you can quickly see what is going on and can use the data to consider elements such as:

Is the cost of sales too high? Do we need to become more efficient at making the item or source a cheaper supplier?
Are revenues too low to cover the operating costs? Do we need to get more customers or look at charging more?
Are the operating expenses too large? Do we need to start making some cost savings?

Call HB Accountants for help

If you want to know how to manage basic accounting tasks – or would like our help on a regular basis – do give us a call. Not only can we help with your questions, we can offer you support with your tax, management accounting and so much more. You can contact us on 01992 444466. We’re accountants for business and for people. We’re here to help.

The information contained above is for general guidance purposes only. Whilst every effort has been made to ensure the contents are accurate, please note that each individual has different circumstances and it is essential that you seek appropriate professional advice before you act on any of the information contained herein. HB Accountants can accept no liability for any errors or omission or for any person acting on or refraining from acting on the information provided in the above.