How to read a profit & loss statement

The Profit & Loss is the most critical of the three core financial statements for a business. It shows how much money the business earned, and how much money the business spent to earn it.

A Profit & Loss, or Income Statement, displays the total revenue and total expenses for a business for a given period of time. If the amount of revenue is higher than the amount of expenses, a business is profitable; if the reverse is true, it’s running at a loss.

Viewing your Profit & Loss Statement

A Profit & Loss Statement can be viewed for a specific period of time. Your Wave Profit & Loss statement allows you to filter by pre-set date ranges, or by a custom date range. You can also choose Compare to prior period to look at two different periods side by side. This is an excellent tool to see how your business is performing over time.

The Profit & Loss statement can be viewed in either Cash Basis or Accrual mode. Cash basis only includes income that has been received from customers and expenses that have been paid to vendors. The exceptions to this are certain non-cash expenses like depreciation and amortization, which are still included in cash basis expenses. Accrual basis reporting includes income that has been invoiced or earned but not received, and expenses that have been billed or accrued but not paid.

You can choose to view your Profit & Loss statement in either the Summary or Detailed mode. Use the Summary view to see only the Total Income, Total Cost of Goods Sold, Gross Profit, Total Operating Expenses, and Net Profit. The Summary view is an excellent way to quickly compare periods, before drilling down into the report details. The Detailed view can be used to see the accounts & categories which make up the aforementioned sections.

 

Understanding your Profit & Loss Statement

The first section of a Profit & Loss shows total revenue less cost of goods sold, or gross profit. 

This means how much revenue was earned, and how much it cost the business to make the products or deliver the services that were sold. Purchases of inventory, manufacturing costs, and other direct costs like a per-item raw materials charge would be included in cost of goods sold.

Gross profit as a percentage of total income, or gross margin is a metric that shows the percentage of sales that the business keeps to pay operating expenses, after paying to produce their products or services. It’s calculated by dividing gross profit by total revenue. Gross margin can also be used by determining a target for gross margin, and adjusting prices or cutting cost of good sold to meet it.

 

 

The section following gross profit is Operating Expenses. These are all expenses for the business that aren’t directly part of the cost of a product or service. This includes payroll and wages, rent, interest, advertising, depreciation, insurance, supplies, and much more. Although these expenses are all necessary in order to have revenue - for example, you buy internet advertising in order to promote your product - they’re not directly attributable to each sale.

 

 

Below operating expenses is Net Profit or Net Loss. This is the “bottom line,” and answers the question of whether a business is making or losing money. It’s useful to compare the profit & loss reports over time to track trends such as whether a company is becoming more profitable as it matures, if sales are growing or shrinking, if expenses are growing or shrinking, and much more.

When you compare periods in your Wave Profit & Loss statement, you’ll see an arrow indicating whether each line item increased or decreased between the two periods so you can see what changed at a glance, and easily see what’s impacting your bottom line.

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