How to Understand a Profit
and Loss Statement
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YOUR BUSINESS FINANCIAL STRATEGY
What is a Profit and Loss Statement?
Here are some key terms for you to review as you explore Profit and Loss Statements.
Profit and Loss Statement (P&L): also known as an Income Statement; measures net income or
loss over a defined period of time.
Depreciation: a calculation to show how your tangible assets lose value over time. While there
are several ways to account for depreciation, the most basic is for an asset’s salvage value
subtracted from its cost to determine the amount to be depreciated.
Balance Sheet: a statement that shows your company’s assets, liabilities and owners’ equity to
indicate financial health at a specific point in time. The goal of a Balance Sheet is to make sure
that your company’s assets are equal to the combination of your liabilities and owners’ equity,
i.e., Assets = Liabilities + Equity (Net Worth). As such, it shows your collection of total assets
plus how they were paid for.
Gross Profit: calculated by taking your income less cost of goods sold, providing a measure of
profit before deducting your other expenses.
Cost of Goods Sold (COGS): captures the direct cost of producing or purchasing your product or
service. COGS is the general term, while some industries, such as retail, use the term cost of sales.
Revenue: the total amount of money received from the sales of your products and/or services.
Net Income: how much money your company is making or losing aer all expenses (rent, outside
services, utilities, etc.) and taxes are deducted, i.e., Your Net Income = Revenue – Expenses.
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