How to read a profit and loss statement?

How to read a profit and loss statement?

A profit and loss statement is a financial statement  that summarizes the income, costs and expenses that were incurred during a specific period.

The information included in a profit and loss  statement , also called an income statement , provides valuable information about the company’s ability or inability to make a profit by increasing revenue, reducing costs, or doing both.

A profit and loss statement  is written based on accounting principles such as income recognition, matching and accrual, which make it completely different from other essential financial documents such as cash flow statements and balance sheets.

These are the main sections that can be found in a profit and loss statement:

  • Income:  is the total amount of money that a profitable company has obtained from sales.
  • Direct costs: these  are the costs incurred when you manufacture your products or provide the services you offer.
  • Gross margin: it  is determined when you subtract your direct costs from your income. Gross margin tells the entrepreneur how much money he has left to cover expenses.
  • Operating expenses:  include rent, salaries, marketing expenses, utilities, etc.
  • Operating income:  is the total income earned before paying interest, taxes, depreciation, etc.
  • Interest –  Only included in a profit and loss statement if the business has to make interest payments on any loan.
  • Depreciation: these  are special expenses that have to do with the assets that your company owns. Over time assets lose value and depreciate. This expense will be calculated in the depreciation section of the income statement.
  • Taxes:  in this section, the entity reserves money to pay the necessary taxes.
  • Net profit:  to calculate it, you have to take the income and subtract the direct costs, operating expenses, taxes, etc.

With all these accounting principles, concepts and terms, you already have a foundation to understand more complicated concepts and continue to expand your knowledge. How to read a profit and loss statement?

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