Follow revenue down to net profit
A detailed P&L starts with revenue. Deduct the cost of goods or services sold to reach gross profit, then operating expenses to reach operating profit. Other income adds to the result; other expenses and applicable income-tax expense reduce it.
A single-step statement groups income and expenses. A multi-step statement shows intermediate subtotals so you can see where profit changes. Use categories that fit the business and keep them consistent between periods.
A retailer earns $4,000 in one month
Suppose a retailer prepares a monthly P&L using accrual accounting. It reports $18,000 in net sales and ends with $4,000 in net profit. The cost of goods sold is matched to those goods; operating expenses include all other operating costs in this example. The $600 tax expense is assumed, not calculated from a tax rate.
Scroll the table sideways to compare all columns.
| Line | Amount |
|---|---|
| Net sales, after returns and allowances | $18,000 |
| Cost of goods sold | ($6,500) |
| Gross profit | $11,500 |
| Operating expenses: rent, staff and other operating costs | ($6,750) |
| Operating profit | $4,750 |
| Other income: interest | $50 |
| Other expense: interest | ($200) |
| Profit before income tax | $4,600 |
| Income-tax expense, assumed | ($600) |
| Net profit | $4,000 |
The $11,500 gross profit is a subtotal, not the final result. Deducting $6,750 of operating expenses leaves $4,750. Adding $50 of interest income and subtracting $200 of interest expense gives $4,600 before tax. The assumed $600 tax expense leaves $4,000.
Prepare the figures from your records
- Choose the reporting period and identify the accounting basis.
- Total revenue, costs and expenses for that period using the books and supporting records. Include returns, credits and corrections in the appropriate accounts.
- Group each item once and reconcile the totals to the records.
- Calculate the subtotals and investigate unexpected changes before sharing the statement.
Under a cash method, income and expenses are generally recorded around receipt and payment. Accrual accounting generally records earned revenue and incurred expenses even if cash moves later. Accounting and tax rules can add exceptions. Confirm the applicable method with your accountant; changing a report’s label does not change the business’s accounting method.
Check cash separately
Suppose customers have not yet paid $2,000 of the retailer’s $18,000 in sales earned that month. The accrual P&L can include those sales while the cash remains outstanding. Its $4,000 profit does not tell you how much money is in the bank.
Read the P&L alongside the balance sheet, which shows assets, liabilities and equity at a date, and the cash-flow statement, which explains cash movements over a period. A loan receipt brings in cash and creates a liability; it is not sales revenue. These differences matter when deciding whether the business can meet upcoming payments.
Find what changed the result
Compare like periods using the same categories and accounting basis. If sales rise while operating profit falls, check both the cost of sales and operating expenses. Show a large one-time item clearly so it does not obscure the comparison.
An extra $1,000 of operating cost would reduce this retailer’s operating profit from $4,750 to $3,750 if everything else stayed the same. An additional dollar of sales does not necessarily add a dollar of profit. Keep actual results separate from forecasts, with records supporting the figures.