M3: Learner Manual

7. Interpreting Financial Reports

7.1. Profit and Loss Statements

Terms used in the Profit and Loss Statement:

Account Name	Each goal identified by the organisation has its own separate funding. The funding monies are put into a separate account and given their own account name.
Selected Period	This will indicate the period of time when the figures were calculated. This usually occurs on a monthly basis.
Year to Date	The total amount for the whole year.
Budget	The estimated amounts that the Committee thought they would spend on this item.
Actual	The amounts actually spent by the organisation. Having the Budget column next to the Actual column allows a committee to immediately see whether they have overspent on an item. If the Budget amount is kept separate from the Actual amount, it is less likely that problems will be seen.
Income	The money the organisation receives or is shortly due to receive. In this case money is being received from a grant, membership fees, donations, some bank interest and wages recovery. Another term often used instead of income is Revenue.
Total Income	If all the figures under Income are added together it will equal this number.
Expenses	Everything that has been spent on this project or committed to be spent in this period. In this case money has been spent on advertising, bank charges, catering etc. Expenses can also be known as Expenditure.
Cost of Sales	Cost of sales (COS) represents all the costs that go into providing a service or product to a customer. It may also be called cost of goods sold (COGS).
Total Expenditure	The total amount spent in expenses.
Net Profit or Loss	The most useful number to look at. This is often referred to as “the bottom line.” It says how much there is left after deducting all the expenses from the income or revenue. If too much has been spent the number may have a minus sign in front of it or have brackets around it. For example: ($5,366)

If the organisation has gone over budget for a selected period too much money has been spent or less money has come in than was expected. If this is the case the Board would ask for an explanation. Perhaps there is money due to come in, but without asking no one will know whether there is money available or you are about to go out of business.

Another word for loss is, Deficit. They both mean the same thing.

Net Loss may also be represented as Net Deficit.

Please see below for an example of a Profit and Loss Statement:[1]

Example Profit and Loss Statement

Joe's Motorbike Tyres
Profit and Loss Statement
For the Period ended Year One
Income
	Sales	$52,000	(1,000 tyres @ $52 each)
	Total Sales	$52,000
Cost of Goods Sold
	Opening Stock	0
	Stock Purchases	$34,320
	Less Closing Stock	$3,120
Total Cost of Goods Sold (COGS)		$31,200	(see note below)
Gross Profit		$20,800
Expenses
	Advertising	$500
	Bank Service Charges	$120
	Insurance	$500
	Payroll	$13,000
	Professional Fees (Legal, Accounting)	$200
	Utilities & Telephone	$800
	Other: Computer Software	$480
	Expenses total	$15,600
Net Profit before Tax		$5,200

Note: Cost of Goods Sold Calculation:
Towards the end of the year, Joe manages to purchase 100 more tyres on credit from his supplier for an order in the new year. This leaves him with $3,120 of stock on hand at the end of the year.
Joe’s Cost of Goods Calculation
Opening Stock	Nil	(1100 tyres @ $31.20 each)
Add Stock Purchased during the year	$34,320
Equals Stock available to sell	$34,320
Less Stock on hand at the end of year	$3, 120	(100 tyres @ $31.20 each)
Cost of Goods Sold	$31,200
Where a business is a service business, that is, you are selling services, not goods or products, then the profit and loss statement will generally not have a cost of goods sold calculation. In some instances, where labour costs can be directly attributed to sales, then you may consider including these costs and a cost of goods (services) sold.

[1] https://business.vic.gov.au/__data/assets/excel_doc/0004/1009516/Financial-statements-template.xlsx