How do I calculate profit and loss?
Quick Answer
To calculate profit and loss, evaluate revenue, cost of goods sold and the expenses incurred, then subtract cost of goods sold and expenses from sales. A positive result denoted profit, while a negative result indicates loss.
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- Calculate revenue
Calculate the income generated for the entity. The income is in the form of sales made if the entity trades or in the form of fees if a service is involved. Invoices and bills issued are the primary sources for getting revenue figures.
- Calculate cost of goods sold
Calculate the cost of goods sold if the entity is part of a trading scenario. Use the formula Cost of goods = Opening stock + Purchases - Closing stock.
- Calculate Expenses
Expenses include all costs that were incurred in order to make sure that revenue was generated. Calculate fixed costs which the entity incurred despite the level of its activities. Make a list of all such costs and sum the figures to obtain a value for expenses.
- Calculate profit and loss
Add the cost of goods sold and expenses, then subtract the sum from revenue. A positive value indicates surplus amount and is called profit, while a negative answer points towards a deficiency and is termed as loss.
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