Good morning, everyone. Today we are going to talk about the Statement of Profit or Loss, which you might also hear called the income statement. Think of it as a report card for a business over a certain period, usually a year. It tells us how much money the business earned, what it spent, and the profit or loss it made. This is crucial for managers, employees, investors, creditors, and even tax authorities to understand how well the business is performing.
Let’s start with Revenue, also called sales turnover. This is all the money a business earns from selling goods or services before any costs are subtracted. For example, if a bakery sells cakes worth $50,000 in a year, that is its revenue.
Next, we have Cost of Sales, also known as COGS, which includes the direct costs of making those goods or delivering services. This could be raw materials or direct labour. The formula is: Opening Inventory plus Purchases minus Closing Inventory.
Subtracting COGS from revenue gives us Gross Profit. This shows the profit made from selling goods before accounting for other costs. For example, if revenue is $50,000 and COGS is $30,000, gross profit is $20,000.
Then we account for Operating Expenses, which are costs not directly linked to production, like salaries, rent, and utilities. After subtracting these from gross profit, we get Operating Profit or profit from operations.
After that, we deduct Taxation to find the Net Profit, also called profit for the year. This is the final profit the business has earned after paying all expenses and taxes.
From this net profit, a business might pay Dividends to shareholders. For example, if net profit is $10,000 and $3,000 is given as dividends, the remainder is kept in the business as Retained Earnings, which can be reinvested or kept as reserves.
Sometimes, the statement needs amendments. This could happen if there were errors in recording revenue or expenses, new tax rules apply, or inventory values change. For example, if an expense was accidentally left out, adding it later will reduce net profit.
It’s important to understand how changes affect the statement. For example, if revenue increases and costs stay the same, profits rise. If expenses increase, profits fall. Changes in taxation or dividends also directly affect the bottom line. For instance, switching to a cheaper supplier reduces the cost of sales, which increases gross profit.
In conclusion, the Statement of Profit or Loss is a key tool for understanding a business’s performance. It breaks down revenue, costs, and profits, helping stakeholders make informed decisions. Understanding how each component works allows businesses and managers to plan effectively, control costs, and ensure sustainable growth.
By the end of this lesson, you should be able to explain the purpose of the Statement of Profit or Loss, identify and define its components such as revenue, cost of sales, gross profit, operating expenses, operating profit, taxation, net profit, dividends, and retained earnings, understand how changes in these affect profits, and recognize its importance for stakeholders’ decisions.
