Reading a profit & loss

The shape of it

A P&L covers a period — a month, a quarter, a year. It has two useful subtotals:

• Gross profit = sales − cost of goods sold. What the trade itself earns, before any of the cost of running a shop.
• Net profit = gross profit − every other expense: rent, salaries, electricity, freight, bank charges, depreciation.

Cost of goods sold is not the same as purchases. It is opening stock + purchases − closing stock — what you actually sold, not what you bought. A shop that bought heavily in March and sold none of it has purchases far above its cost of goods sold, and a P&L ignoring the difference would show a loss that did not happen.

The two lines to look at

Gross profit as a percentage of sales. Track it month by month. It should be steady, and when it drops the cause is one of four things: buying prices rose, you discounted more, stock is going missing, or something is being sold below cost. All four are worth knowing within a month, not at year end.

Expenses as a percentage of sales. Rent and salaries do not fall when sales do, which is what turns a quiet quarter into a loss.

Profit is not cash

The single most common surprise. You can show a good profit and have an empty cash box, because:

• Credit sales are profit today and money later — or never.
• Stock bought is cash gone, but it is not an expense until it sells.
• A loan repayment leaves the bank and never appears on the P&L. Only the interest does.
• Money you drew for yourself is not an expense at all.

Which is why a P&L is read beside the balance sheet and the outstanding list, never alone.

Where it comes from

A P&L is not typed. It is the trial balance with the income and expense ledgers taken out and totalled — which is why a mis-grouped ledger changes your profit silently. See the chart of accounts. In Aned Book it is a Silver report, and cost centres let you read it one branch or one counter at a time, which is how you find out whether the second shop is worth keeping.

Which edition. Accounting — ledgers, vouchers, trial balance, profit & loss and balance sheet — is in Silver. Basic is billing and inventory: invoices, stock, parties, outstanding and GST reports, and no ledgers. Both prices are on the pricing page.

This page explains how book-keeping works so a shopkeeper can follow what an accountant is asking for. It is not accounting or tax advice — talk to your accountant before you rely on it for a filing or a return.

Questions

Why is my profit high but there is no cash?

Usually credit sales not yet collected, and stock bought but not sold. Both are profit or assets on paper and no money in the box.

Is purchases the same as cost of goods sold?

No. Cost of goods sold is opening stock plus purchases minus closing stock — what you sold, not what you bought.

How often should I read a profit and loss?

Monthly. A gross profit percentage that moved is a fact you can act on in the same month; at year end it is only history.