Profit and Loss Account

Profit and Loss Account

When reading the Profit and Loss Account you should understand the following definitions:

• Gross Profit: Gross Profit consists of sales less purchases. If sales is €300,000 and purchases is €210,000 then the gross profit will be €90,000. Gross Profit is the Profit before any expenses are taken into account.
• Net Profit: Net Profit consists of Gross Profit less expenses. Expenses include Carriages Out, Light/Heat, Electricity and Wages. Net Profit is the actual profit a company makes each year.
• Reserves/Retained Earnings: This is the final line of the account. It consists of Net Profit less any Dividends paid to shareholders plus the reserves from the previous year. This is the amount of money the company carries forward to the next year.

What does the Profit and Loss Account show

• Profit from Direct Selling: The income statement shows how much profit is made from the direct selling of products, referred to as gross profit.
• Net Profit: It also shows what is left after deducting other expenses, known as net profit.
• Gap Analysis: If there is a large gap between gross profit and net profit, it might indicate that a business has too many indirect expenses. This could suggest the need to reduce staff, cut down on advertising, or find cheaper service providers such as for light, heat, or insurance.
• Investor Insights: The income statement provides investors with information on how profitable the business is. It also shows how much has been paid out in dividends, with higher dividends generally attracting more investors.