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What is a profit and loss report?

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Quick Answer

A profit and loss report is a business statement that weighs the income of a business versus its costs. This helps calculate the overall profits or losses, according to the Ohio State University.

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Full Answer

A profit and loss report can be for any fixed period of time. Some businesses prepare them quarterly, while others prepare them on a monthly or even weekly basis. The report is also known as an income statement, earnings statement or statement of financial performance, according to Business News Daily.

There are usually four sections of a profit and loss report: the gross profit, the operating profit, the earnings before tax and the earnings after tax. The gross profit is the total sales for the period minus the cost of goods sold. The cost of goods sold is the beginning inventory plus new inventory purchases minus the final inventory at the end of the period.

To calculate the operating profit, businesses must subtract all operating expenses. These are fixed expenses involved in the business and are often listed as selling, general and administrative expenses. These costs can include things like personnel salaries, travel costs, utilities, advertising, postage costs and insurance.

To calculate the earnings before tax, managers must subtract all discretionary expenses from the operating profit. These include things like the cost of interest on business debt, depreciation of assets that the business owns, officer's salaries and rent.

To calculate the final profit or loss after tax, managers should subtract all tax from the final figure.

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