What a business earned, line by line
A profit and loss account is a list of what came in, what it cost, and what was left. This lesson builds one for a small shop, then reads the same list in a real company's accounts.
- Level
- Beginner
- Reading time
- About 21 minutes
- Know this first
- What is finance?
By the end you will be able to:
- explain revenue, expenses, profit and loss in plain words
- build a simple profit and loss account and say what each line means
- tell gross profit, operating profit and net profit apart
- read the profit and loss account of a real listed company
Three words, one subtraction
Revenue is what a business earns by selling goods or services in a period. Expenses are the costs of running the business in the same period. Profit is what is left when expenses are taken away from revenue. If expenses are larger, the result is a loss.
That is the whole idea: revenue less expenses equals profit. Everything else in a profit and loss account is a way of breaking those two numbers into smaller pieces, so you can see where the money was earned and where it went.
A profit and loss account covers a period, such as a month or a year. It is a record of what happened across that stretch of time. Most companies in India also call it the statement of profit and loss, or the income statement.
Try it with a shop
Meena runs a stationery shop. She is made up for this lesson, and she is the same Meena who appears in the lessons that follow. Every item she sells goes for ₹400 and costs her ₹240 to buy. Each month she also pays ₹80,000 for rent, salaries and electricity. Move the sliders to change how many items she sells and what her running costs are.
Meena sold 1,000 items for ₹4,00,000 and made a profit of ₹80,000. Each item leaves ₹160 after its own cost, and she needs 500 items to cover ₹80,000 of running costs.
Drag items sold down towards 400 and the profit turns into a loss, shown in red brackets. Each item leaves ₹160 once its own cost is paid, and that ₹160 has to cover the running costs before anything is left over. The number of items at which she exactly covers her costs is called the break-even point.
Profit comes in layers
"Profit" on its own can mean three different things, depending on which costs have been taken off. Reading a company's results, the first question is always which layer is being quoted. To show all three, suppose Meena also pays ₹10,000 of interest on a loan, and tax of 25% on her profit. Both figures are assumptions for the example.
| Line | ₹ | What it tells you |
|---|---|---|
| Revenue | 4,00,000 | All the sales for the month |
| Cost of goods sold | (2,40,000) | What the items sold cost her |
| Gross profit | 1,60,000 | Whether the goods themselves earn a margin |
| Rent, salaries, power | (80,000) | The cost of running the shop |
| Operating profit | 80,000 | Whether the business works, before borrowing and tax |
| Interest on a loan | (10,000) | The cost of borrowed money |
| Profit before tax | 70,000 | The figure tax is worked out on |
| Tax at 25% | (17,500) | Paid to the government on the profit |
| Net profit | 52,500 | What belongs to the owner |
Gross profit is revenue less the direct cost of the goods sold. It shows whether the goods themselves are sold at a worthwhile margin. Operating profit takes off the costs of running the business as well. It shows whether the business works before borrowing and tax are considered. Net profit is what remains after interest and tax, and it belongs to the owners.
A real company: Titan
Titan Company Limited, the Tata group company behind Titan watches, Tanishq jewellery and Fastrack, publishes its accounts every year. Below is its standalone statement of profit and loss for the year to 31 March 2024, with its lines as printed and the revenue subtotal added, in ₹ crore. One crore is ten million.
| ₹ crore | FY2023-24 | FY2022-23 |
|---|---|---|
| Sale of products and services | 42,965 | 35,624 |
| Other operating revenue | 4,149 | 2,646 |
| Revenue from operations | 47,114 | 38,270 |
| Other income | 510 | 299 |
| Total income | 47,624 | 38,569 |
| Cost of materials and components consumed | 33,556 | 25,085 |
| Purchase of stock-in-trade | 5,535 | 5,438 |
| Changes in inventories | (2,149) | (1,477) |
| Employee benefits expense | 1,503 | 1,362 |
| Finance costs | 480 | 240 |
| Depreciation and amortisation | 447 | 364 |
| Advertising | 829 | 739 |
| Other expenses | 2,816 | 2,353 |
| Total expenses | 43,017 | 34,104 |
| Profit before tax | 4,607 | 4,465 |
| Current tax | 1,072 | 1,140 |
| Deferred tax charge or (credit) | (9) | (8) |
| Total tax | 1,063 | 1,132 |
| Profit for the year | 3,544 | 3,333 |
The structure matches Meena's, with more lines. Revenue from operations was ₹47,114 crore. Other income, such as interest on its investments, added ₹510 crore, giving total income of ₹47,624 crore. Expenses came to ₹43,017 crore, which left a profit before tax of ₹4,607 crore. After ₹1,063 crore of tax, the profit for the year was ₹3,544 crore.
Three things worth noticing
Expenses are listed by type. Meena's ledger shows one line for the cost of what she sold. Titan lists materials, bought-in stock, staff, finance costs and so on. Add the first three lines and you get the cost of goods: ₹36,942 crore. Revenue from operations less that figure is ₹10,172 crore, my own arithmetic and not a line Titan prints.
A negative expense. "Changes in inventories" is (2,149) crore. It is negative because Titan finished the year holding more stock than it started with. The materials and stock it bought included goods not yet sold, and those costs belong to a later year. The lesson on cash vs profit follows the cash consequences of the same stock build-up.
Costs moved at different speeds. Revenue from operations rose 23%, from ₹38,270 crore to ₹47,114 crore, while profit for the year rose 6%. Finance costs, the interest on borrowing, doubled from ₹240 crore to ₹480 crore. As a share of revenue from operations, profit for the year slipped from 8.7% to 7.5%.
Be careful with that margin. Titan's revenue from operations includes some low-margin items. Its earnings presentation also reports operating revenue excluding bullion sales, at ₹43,174 crore, so the margin on jewellery and watches alone would look different. This is an educational reading of published figures, not a view on whether Titan's shares are a good or bad investment.
Three global companies, one subtraction
The subtraction in this lesson, revenue less expenses leaves profit, is the same in every company. What differs between businesses is how large each layer is. The table takes the latest fiscal year of three of the world's largest companies and shows how much of every dollar, or yen, of revenue stays as profit at each stage. Apple and Microsoft report in US dollars and Toyota in yen, so the amounts are in different currencies, but the margins are comparable.
| Latest fiscal year, millions of each currency | Revenue | Costs and expenses | Operating profit | Operating margin | Net income | Net margin |
|---|---|---|---|---|---|---|
| Apple | $416,161 | $283,111 | $133,050 | 32.0% | $112,010 | 26.9% |
| Microsoft | $281,724 | $153,196 | $128,528 | 45.6% | $101,832 | 36.1% |
| Toyota | ¥48,036,704 | ¥43,241,118 | ¥4,795,586 | 10.0% | ¥4,789,755 | 10.0% |
Microsoft keeps the most of every dollar it earns: an operating margin of 45.6% and a net margin of 36.1%. Apple's operating margin is 32.0% and its net margin 26.9%. Toyota's operating margin is 10.0% and its net margin 10.0%. The gap says something about each business. Microsoft earns 77.3% of its revenue from services and other revenue, which cost little to deliver once the software and the data centres are in place. Apple's gross margin was 46.9% against Microsoft's 68.8%, and its mix of products and services, with services at 26.2% of revenue, sits between a hardware business and a software one. Toyota builds and sells vehicles and runs a financial services arm that lends to its customers, which was 9.2% of its revenue, and a manufacturing business with that cost base keeps a much smaller share of each yen.
What lies below operating profit
Below the operating line, the statements show items that are not part of making and selling the main product. Apple reports a single line for other income and expense, a net expense of $321 million. Microsoft reports other expense, net, of $4,901 million; the summary statement does not say what is in it, and the annual report's notes do. Toyota gives much more detail on the face of its statement, and the items are large:
- Share of profit of companies accounted for using the equity method: ¥591,219 million
- Other finance income: ¥556,700 million
- Other finance costs: ¥190,711 million, taken off
- Foreign exchange gain, net: ¥705,292 million
Together these items change Toyota's ¥4,795,586 million of operating income into ¥6,414,590 million of income before tax, a net addition of ¥1,619,003 million. Two features are worth noting. The profit does not all belong to Toyota's shareholders: ¥24,670 million of the net income belongs to minority owners of subsidiaries, leaving ¥4,765,086 million for shareholders of the parent company. And the lines below operating profit are large enough that someone looking only at operating income would see a different picture of the year than someone looking at net income.
Presentation differs by country, and is changing
Each of the three companies lists its costs by function: cost of sales, research and development, selling and administration. That is common, but it is a choice and not a rule, and the practice of presenting an "operating profit" subtotal has never been defined the same way everywhere. Two companies can both report an operating profit and draw the line between operating and non-operating in different places. Toyota, for example, places its share of the profit of equity-accounted companies after operating income.
The IASB has issued a new standard, IFRS 18, that takes effect on 1 January 2027 and tightens this. It requires every company under IFRS to classify income and expenses into operating, investing, financing, income taxes and discontinued operations, and to show subtotals for "operating profit" and for "profit before financing and income tax". Results of equity-accounted companies move out of operating profit into investing. The result is that operating profit will mean more nearly the same thing across IFRS companies, though it will not by itself remove the difference from US GAAP companies. The lesson to take from this: before comparing the margins of companies in different countries, check where each draws the line.
Common mistakes
Treating revenue as profit
Revenue is the top line before any cost. Titan took in ₹47,114 crore and kept ₹3,544 crore. A business with large revenue can still make a small profit, or a loss.
Treating profit as cash
Profit is a record of what was earned and used up. It is not money in the bank. Customers may not have paid yet, and stock may have been bought but not sold. The lesson on cash vs profit is about exactly this.
Mixing up the layers of profit
Gross, operating and net profit can differ widely for the same business. Always check which one a headline number refers to. Compare like with like: net profit with net profit.
Comparing profits without margins
A shop that makes ₹1 lakh on ₹10 lakh of sales is doing better than one that makes ₹1 lakh on ₹50 lakh. Divide by revenue before you compare.
Counting one-off gains as the business
Other income, such as interest on investments, is part of profit before tax, but it does not come from selling the company's main products. Look at it separately when you judge how the core business did.
Try it yourself
1. In a month a bakery sells ₹2,50,000 of bread and cakes. The flour, butter and other ingredients in what it sold cost ₹1,00,000. Wages, rent and gas cost ₹1,20,000. What are its gross profit and its profit?
Show the working
Gross profit is ₹2,50,000 less ₹1,00,000, which is ₹1,50,000. Profit is ₹1,50,000 less ₹1,20,000, which is ₹30,000. Its gross margin is 60% and its profit margin is 12%.
2. A tutor earns ₹90,000 in a month and spends ₹55,000 on rent, travel and materials. She also pays ₹12,000 of interest on a loan. What is her profit after interest, and what would it be if her income fell to ₹60,000?
Show the working
₹90,000 less ₹55,000 less ₹12,000 is ₹23,000. At ₹60,000 of income it is ₹60,000 less ₹55,000 less ₹12,000, which is a loss of ₹7,000, written (7,000). Her costs did not fall when her income did.
3. A shop sells each item for ₹250 and buys each for ₹150. Its monthly running costs are ₹50,000. How many items must it sell to break even?
Show the working
Each item leaves ₹250 less ₹150, which is ₹100. The running costs are ₹50,000, so it needs ₹50,000 ÷ ₹100 = 500 items. Selling the 501st item is the first one that adds to profit.
Where this is used
Anyone who runs, lends to or invests in a business reads a profit and loss account.
- An owner reads it every month to see whether the business is covering its costs and which layer is under pressure.
- A lender looks at operating profit, and at whether it comfortably covers the interest on the loan.
- An analyst compares margins across years and across companies in the same trade to see who is gaining or losing ground.
- A tax adviser starts from profit before tax, which is the figure tax is worked out on, with adjustments.
Key terms
- Revenue
- What a business earns from selling goods or services in a period. Also called sales or turnover.
- Expense
- A cost of running the business that is used up in the period.
- Cost of goods sold
- The direct cost of the goods that were sold in the period.
- Gross profit
- Revenue less the cost of goods sold.
- Operating profit
- Gross profit less the costs of running the business, before interest and tax.
- Profit before tax
- Profit after interest and all other costs, but before income tax.
- Net profit
- What is left after tax. Titan calls it "profit for the period".
- Margin
- A profit divided by revenue, usually shown as a percentage.
- Break-even point
- The level of sales at which revenue exactly covers all costs, so profit is zero.
Questions people ask
Is profit the same as income?
In everyday speech people use both words for what is left over. In accounting, "income" can mean revenue, other income, or profit depending on the context, so always check the line you are reading. This site says revenue for what is earned and profit for what is left.
Why does a company with a profit sometimes run short of cash?
Because profit counts what was earned and used up, not when the money moved. Unpaid customers and unsold stock tie up cash. The lessons on cash vs profit and on accrual vs cash accounting cover this in detail.
Is a loss always bad?
Not always. A young business may lose money while it builds up customers. What matters is why the loss arose and whether it is shrinking. A loss from costs that will not recur reads very differently from a loss that repeats every year.
What is the difference between profit and loss and a balance sheet?
The profit and loss account covers a period and shows what was earned. The balance sheet is a snapshot of what the business owns and owes on one date. The next lesson introduces the balance sheet.
Sources and review
- Titan Company Limited, audited standalone and consolidated financial results for the year ended 31 March 2024, filed with BSE. Source of every line in the Titan table.
- Titan Company Limited, Q4 and FY24 earnings presentation, filed with BSE and NSE on 3 May 2024. Source of operating revenue excluding bullion.
- IFRS Foundation, Conceptual Framework for Financial Reporting, the framework behind the definitions of income and expenses used by Ind AS.
- Apple Inc., Form 8-K, Exhibit 99.1: fourth quarter and full-year fiscal 2025 results, filed with the US Securities and Exchange Commission. Source of Apple's statements.
- Microsoft Corporation, Form 8-K, Exhibit 99.1: fourth quarter and fiscal year 2025 results, filed with the US Securities and Exchange Commission. Source of Microsoft's statements.
- Toyota Motor Corporation, FY2025 Financial Summary (IFRS, unaudited, in millions of yen), furnished to the US Securities and Exchange Commission on Form 6-K. Source of Toyota's statements.
- KPMG, IFRS 18 Presentation and Disclosure in the Financial Statements, for the new categories and subtotals in the income statement, effective 1 January 2027.
How the numbers were checked: every subtotal in the Titan table was rebuilt by adding the printed lines, and each one matches the filing. Meena's figures are calculated on this page, and the break-even point was checked against every combination of the two sliders.