An ultimate Guide to Profit and Loss

The concepts of profit and loss are frequently employed in our daily lives. If the selling price is greater than the cost price, then the difference between the selling price and cost price is called profit. The gap between the cost price and the selling price is called loss if the selling price is less than the cost price. In short Profit stands for gain, advantage or benefit whereas loss is the opposite of profit that involves expenditure as compared to gain.

Profit and loss is a notion that has evolved from many applications to extreme challenges that occur virtually every day in our lives.

Related Terms

Cost Price(C.P.) :-

The amount at which a product is purchased along with includes overhead expenses, transportation cost, etc in some cases is called Cost Price. It is also abbreviated as C.P. Example

Bought an Air conditioner for 25,000/-

Transportation charges=4,500

Total Expenditure (C.P.)=29,500/-

Selling Price (SP):-

Selling Price (SP) is the amount at which a product is sold. It may be more than, equal to or less than the cost price of the product. For example, a Mug was bought for Rs 200 and sold at Rs 400 then the selling price of the mug is Rs 400. 

Profit(P):-

A seller makes a profit when a product is sold for more than its cost price. Consider the preceding scenario of purchasing a mug for Rs200 and selling it for Rs400. The profit would then be 200 Rs.

CP<SP = Profit

or,

Profit = Selling Price – Cost Price

Loss (L):-

If a product is sold at a price less than its cost price then the seller makes a loss. Example if the mug bought for 200 was sold for 150 Rs. Then it is considered a 50 Rs loss.

CP>SP = Loss

or,

Loss = Cost Price-Selling Price

Profit and Loss Statement(P&L):–

A profit and loss statement (P&L) also known as an income statement or a statement of operations, is a financial statement that summarizes a company’s sales, expenses, and profits/losses for a specific time period. The profit and loss statement demonstrates a company’s capacity to produce sales, control expenses, and make money. It differs from the cash flow statement in that it is prepared using accounting concepts such as revenue recognition, matching, and accruals.

Structure of P&L:-

The profit and loss statement of a corporation is shown over a period of time, usually a month, quarter, or fiscal year. The following are the primary categories featured on the P&L:

Revenue (or Sales)

The money you bring in from your sales is referred to as revenue, or the “top line” of the P&L.This is money generated from fundraising if you’re a non-profit or by selling products or services. A company’s sales are usually detailed, and the overall sales amount is then transferred to the P&L. Revenue is a crucial figure because it plays an important role in your Profits and losses.

Direct costs

Direct costs, also known as cost of goods sold (COGS), are the expenses you spend when creating or delivering your products or services. Rent and payroll aren’t included here, but you would include the items that directly contribute to each sale.

For example, the direct cost of each sale for a bike shop is the price paid by the shop to purchase the bikes from the manufacturer. Direct costs for a bike maker would include the cost of the metal and plastic required to construct the bike.

 Gross margin:-

After you’ve covered the cost of the product or service you’re selling, your gross margin tells you how much money you have left over to meet your expenses. You may calculate your gross margin by subtracting your direct costs from your revenue.

Revenue – Direct Costs = Gross Margin

Operating expenses:-

Operating expenses are all of the charges you incur to keep your business open, minus the direct costs .Rent, salaries and benefits, marketing expenses, research & development expenses, utilities, and so on are typically included. 

Operating Expenses = Expenses – Direct Costs

 Operating income:-

EBITDA stands for operating income (earnings before interest, taxes, depreciation, and amortization). This is derived by deducting your gross margin from your overall operating expenses.

Operating Income = Gross Margin – Total Operating Expenses

Interest Expenses:-

This wiill include interest payments that your company is making on any outstanding loans.

 Taxes:-

Any taxes that you pay or expect to pay on your sales show  here.

Net Income:-

It’s what’s known as the “bottom line,” sometimes known as net income or net earnings. The “top line” was the income, and if you subtracted items like direct expenditures, operational expenses, and so on What’s left is your profit or loss, depending on whether you spent more than you made.

Impact Of Accounting Principles on P&L Statement:-

The following are the primary factors that determine the difference between profit and cash generation:

a] Principle of revenue recognition – revenue is frequently recorded before cash is paid (which creates accounts receivable on the balance sheet)

b] Expenses are matched to revenues during the period(s) in which such revenues are received.

c] The accrual principle states that income and expenses should be recorded when they occur rather than when cash is received, which can cause revenue and expenses to diverge significantly from cash flow.

The profit and loss statement is an important tool for managing your company’s finances, and learning how to read one is essential for acquiring the information you need to operate it. You’ll be able to develop more accurate financial estimates and recognize your prospects for growth if you have a good understanding of how things are trending and which areas to focus on. Profit and Loss hence plays a vital role not only in the life of businessmen but also common people as most deals relating to money revolve around these two pillar concepts.