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Profit and loss statement for a commercial company usually follow this
structure:
Sale / Turnover
- Variable Costs / Used Goods
= Gross Profit
- Fixed Costs
- Depreciation
- Interest
= Profit
Profit and loss statement - explanationSale / Turnover
Sale / turnover is the "the money you receive from the customers"
when they have purchased a product or service from you.
- If you sell 10 pairs of shoes at 100 $ your sale / turnover will be 1.000
$
- If you sell 5 hours of consultancy service at 75 $ per hour your sale
/turnover will be 375 $.
Any sales tax will not be a part of the profit and loss statement. Sales tax will be accounted
for separately.
Variable Costs / Used Goods
In the second line of the Profit & Loss Statement all expenses directly
connected with the sale are deducted. The more you sell the higher variable
costs.
- If you expect to sell 10 pairs of shoes you have to buy 10 pairs of shoes.
- If you expect to sell 7.000 pairs of shoes you have to buy 7.000 pairs of
shoes.
The buying of shoes is directly connected with the selling of shoes (used
goods).
If you produce leather shoes you have to buy leather (raw material). The
purchase of leather will show as variable costs / used goods in the profit and loss statement.
Consultants rarely have expenses concerning the "variable costs / used goods". For instance an accountant has few direct expenses in producing the
yearly accounts for a client. Maybe 20 sheets of paper.
Gross Profit
The difference between Sales and Variable Cost is called Gross profit. It
shows how much money you have got left to pay for instance your rent, telephone,
internet access, marketing and your own pay.
- Read more about
Gross Profit / Contribution margin
Fixed Costs
Fixed costs will usually not be higher if you sell more. And not lower when
you sell less. The rent of the shoe shop will be the same whether you sell 10
pairs of shoes or 150 pairs of shoes.
The staff might be able to sell 150 pairs of shoes. But they only sell 10
pairs. It takes time to lay off staff so Staff expenses is considered a Fixed
cost.
Fixed costs can be variable - like a telephone bill. It is because the
telephone bill does not necessary vary with sales volume. The variation is due
to other circumstances than the sales volume.
Write Of / Depreciation
You invest in a new building for your business. Or you purchase a 10
thousand dollar machine. You can not deduct such big investments in the accounts
the first year. The investment must be spread out over several years.
One way to do it is to depreciate / deduct / write of 30 % of the value every
year. An example:
- A machine cost 10.000 $.
Year 1 you can deduct 3.000 $ in the profit and loss statement
(30 % of 10.000).
Year 2 you can deduct 2.100 $
(10.000 - 3.000 = 7.000. 30 % of 7.000 = 2.100)
For specific rules in your country contact an accountant or the relevant
authorities.
- Read more
about Depriciation
Interest
If you borrow money in a bank you will see the interest deducted as an
expense in the profit and loss Statement. Also the different charges to the bank
can be deducted.
Interest for money borrowed from family or other sources can usually not be
deducted.
For specific rules in your country contact an accountant or the relevant
authorities.
Profit / Net income
Also referred to as profit/loss or proprietor´s salary. Net income is the
proceeds a proprietor makes from running his/her business. Net income does not
always exist in terms of cash. It can be partly or fully tied-up in stocks or
balance due from customers.
- Read
more about how to Influence your Profit
- Go to next
business issue: The Balance Statement
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