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Overview of the profit and loss statement

The profit and loss statement, aka P&L, or an income statement, is one of the most critical financial statements to understand as a business owner. The P&L gives you a clear view of how your business is doing at the end of any given time and allows you to make informed decisions to steer your business in the right direction. 

As Xero bookkeepers and spreadsheet specialists, we specialise in accurate and easy-to-read financial reports, which we review with our clients.

Profit and Loss Basics

A profit and loss statement tracks money in versus money out. This will tell you whether you had a profit or a loss for a given time. We can create reports for any period. 

  • A monthly P&L will allow you to compare sales and revenue throughout the year. 
  • A quarterly P&L will give you a broader overview of your business’s success or failure. 
  • A yearly P&L will be invaluable information to share with your Xero Accountant come tax time. 

The Christmas period is an excellent example of comparing periods for a sales-type business.  We dive deeper into the analytics of what is or isn’t working for your business to improve sales for the following Christmas period.

The P&L in detail:

Revenue – The first line in the profit and loss statement is gross revenue. Gross revenue is your primary source of income, made up of products, services, or both.

Businesses that offer products and services, such as a hairdresser that sells beauty products, will have two revenue lines on their P&L to distinguish between product and service revenue.  

Less Cost of goods – The cost of goods refers to the raw materials used in the products you sell. If you make ceramic mugs, the cost of clay and glaze is included in the cost of goods sold. 

However, if your business offers a service such as coaching, you might wish to amend your cost of goods sold to a better descriptive term such as Cost of Sales. Service-based businesses may have a minimal actual cost of goods sold.

In either case, the cost of goods sold is the first expense deducted from revenue.

Equals Gross Profit – A business’s profit after subtracting all costs related to manufacturing and selling its products or services.

The Gross Profit margin is essential to see if the sales are priced correctly. A gross profit margin ratio of 50 to 70% would be considered healthy, and it would be for many types of businesses, like retailers, restaurants, manufacturers and other producers of goods.

Have you checked your gross profit margin to ensure you have enough money to pay your administrative and staff expenses?  This is a vital calculation that many Bookkeepers and Accountants miss.

Plus Other Revenue – Income not directly related to your primary source of income. For example, interest income, rental income or an insurance claim.

Less Expenses – Expenses incurred that are not directly related to sales. These include 

  • Bank fees
  • Staff costs
  • Business travel – flights, accommodation, car hire etc.
  • Postage
  • Insurance 
  • Rent and utilities
  • Interest expense
  • Depreciation and amortisation

Equals Net​​ Profit or Loss – Net profit is what the business gets to keep, which makes it one of the most important numbers review.

Also called net earnings and net income, net profit can be distributed to business owners or reinvested into the business.

And if you see a loss? No need to panic.  That’s where we step in to work with you and your Tax Accountant. We can figure out if things may need to be changed or updated or if it’s just a slow time of year.

As Certified Xero bookkeepers, we know Xero inside out and love to review the Profit & Loss statements with our clients.  We also create P&L reports for clients too small for accounting software such as Xero.

Contact us today for a free discovery call.

Nea Alexandra Bookkeeping is based in beautiful Byron Bay, servicing Australia-wide.

Profit and Loss – comparison example

Hair Salon
For the year ended 30 June 2022

Account2022202120202019TOTAL for four years
Trading Income
Sales – Servies90,00080,00085,00095,000350,000
Sales – Products60,00055,00047,00057,000219,000
Total Trading Income150,000135,000132,000152,000569,000
Cost of Sales
Products purchased30,00027,50023,50028,500109,500
Total Cost of Sales30,00027,50023,50028,500109,500
Gross Profit
Gross Profit Margin
Other Income
Interest Income100120110115445
Rental income from beautician10,0009,0008,0007,00034,000
Total Other Income10,1009,1208,1107,11534,445
Operating Expenses
Accounting & Bookkeeping fees4,0003,5003,0003,00013,500
Bank Fees95908080345
Interest Expense55504540190
Light, Power, Heating1,5001,4001,3001,2005,400
Printing & Stationery200300250200950
Repairs and Maintenance7005006004002,200
Staff Amenities1,5001,7002,0002,0007,200
Telephone & Internet1,6001,5001,4001,3005,800
Travel – National2,0001,9001,9501,9007,750
Total Operating Expenses18,76517,61417,44916,55370,380
Net Profit111,33599,00799,161114,063423,565

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