Profit and Loss Statement - Understand P&L in Depth

In the world of finance and business, there is no document more important than the Profit and Loss Statement, or P&L, which is a financial report showing profits and losses that helps investors, managers, and business owners understand how the company is performing. Being able to read and analyze a profit and loss statement in English is a key skill essential for those looking to invest or manage a business in the global market.

Origin of the P&L Statement and Why It Matters to Investors

The Profit and Loss Statement is a document that displays a company’s operational results over a specified period, presenting information about revenue, expenses, and the company’s profit or loss.

Investors and managers pay close attention to the P&L because:

• Measures Financial Performance – The P&L helps reveal how profitable the business is.
• Assesses Financial Health – Indicates whether revenue covers expenses.
• Supports Strategic Planning – Provides a basis for decision-making to improve profitability.
• Predicts Future Performance – Analyzing trends over multiple periods can forecast future results.

Basic Formula: Understanding Revenue and Expenses

The core of understanding a profit and loss statement is knowing the basic formula:

Total Revenue – Total Expenses = Profit/Loss

This simple equation covers the fundamental principles of business. Breaking down each component:

Total Revenue – The total income received from selling goods, services, or other sources such as interest from investments, rent, or sale of assets.

Total Expenses – All costs incurred to operate the business, including rent, salaries, advertising, raw materials, utilities, etc.

Profit or Loss – The difference between revenue and expenses. If revenue exceeds expenses, it’s a “profit”; if expenses are higher, it’s a “loss.”

Profit Levels – From Gross Profit to Net Profit

An interesting aspect of the Profit and Loss Statement is the display of different “profit levels,” each telling a different story about the business:

Gross Profit – Calculated as: Revenue from sales – Cost of Goods Sold (COGS)

• Shows how much the business can mark up prices over production costs.
• Used to measure: production efficiency and cost management.

Operating Profit (or EBIT) – Calculated as: Gross Profit – Operating Expenses (Selling, General & Administrative Expenses)

• Indicates how much profit remains after accounting for operational costs.
• Used to measure: overall operational efficiency.

Earnings Before Tax (EBT) – Calculated as: Operating Profit – Financial Expenses (interest, etc.)

• Shows the true profit before taxes.
• Used to measure: the actual performance of the business.

Net Profit (or Net Income) – Calculated as: EBT – Taxes

• Reflects the actual profit owners or shareholders receive after all expenses.
• Used to measure: the final performance delivered to stakeholders.

Report Form vs. Account Form – How to Choose

The profit and loss statement is reported mainly in two formats, each with a different presentation style:

Report Form

This is the modern, widely used format, listing revenues and expenses in a sequence from top to bottom, culminating in net profit, like a story: