Entrepreneurship - P&L Statement

Entrepreneurship - P&L Statement

Learning Objectives

• You will understand profit and loss, components of a simple profit and loss statement, and the importance of a profit and loss statement.

• You will calculate profits using gross income, total expenses, and cost of goods sold.

• You will analyze monthly profit and loss statements for a school store and calculate profit margin percentages.

Key Terms

• Profit – the net income that remains after deducting all expenses and costs of doing business

• Net Loss – the loss that results when expenses and costs are greater than income

• Profit and Loss Statement – a financial statement or record that helps to track a business; also called a P&L

• Gross income – the income generated from sales; calculated by multiplying price by quantity; also referred to as gross sales

Key Terms - cont'd

• Inventory – a list of goods or materials in stock and available to be sold

• Cost of Goods Sold – the cost of selling goods or items; calculated as theopening merchandise inventory plus purchases minus closing merchandiseinventory

• Expenses – cost associated with sales, administration, and advertising

• Profit Margin – net income or loss divided by gross income/sales; written as apercentage

Why is Understanding Profit & Loss Important?

• To understand if the store is making money

• To understand what specific store products are making money and whichmay be losing money

• To reduce expenses if needed

Understanding P&L cont'd

• To change product pricing to increase revenue

• To plan for future purchases including inventory and other expensesassociated with running the business

• To understand if the store can afford future investments (e.g. increasingstore space, hiring more help, upgrading computer systems etc.)

Profit & Loss Components

• Identify the income and expenses for a lemonade stand.

• How would you determine the income for lemonade sales?

• What expensesare associated with having a lemonade stand?

Lemonade Stand

Profit & Loss Components

• Open New Doc: Title it- P&L Components

• Insert table: 2 Columns by 11 Rows

• Title Column 1 - Income Components

• Title Column 2 - Possible Expenses

• Make a list of each

Image of P&L Components Chart

A P&L statement keepd track of a business

• Gross income

• Cost of goods sold 

• Expenses

• Net income 

Gross Income

• Gross income is income generated from sales

• It is the price of a product multiplied by the quantity sold

• For example, if a store sold only beaded necklaces and each necklace cost $5.00 each, the gross income would be the number of necklaces sold multiplied by the $5.00 price per necklace.

• 20 Necklaces Sold at $5.00 ea = Gross Income of = $100.00

Cost of Goods Sold

• Cost of goods sold is the cost of selling goods or items during a specified period of time. 

• The cost of goods sold is the opening merchandise inventory plus purchases made during the period less the closing merchandise inventory.

Expenses

• Expenses include selling, administration, and operating expenses.

• Expenses specifically may include rent, salaries, and advertising.

Net income 

• Net income is gross income minus the cost of goods sale and expenses. 

• This is the profit made on sales. 

• If the cost of goods sold and expenses are greater than the gross income, the business had not made a profit.

• The business would record a net loss.

Profit & Loss Statement

The profit and loss statement must be accurate because it helps a business make important decisions. The goal of a business is to increase profits.