Is it important? The profit and loss statement is a key tool for measuring performance.

If you are an investor or executive, the profit and loss statement is a document you must understand deeply because it tells the story of a business’s profitability over a certain period, whether monthly, quarterly, or annually.

What exactly is a profit and loss statement?

Profit and Loss Statement (P&L) or in Thai accounting called งบกำไรขาดทุน is a financial document that summarizes operational results. It shows how much revenue the business generated, how much it spent, and whether it made a profit or incurred a loss during the specified period.

The calculation is simple: Total Revenue – Total Expenses = Profit (or Loss)

This formula is straightforward, but the results help business owners or investors understand whether the business is moving toward success or failure.

Why should you look at the profit and loss statement?

There are several reasons why the profit and loss statement is an essential tool:

Profitability - Through this statement, you can see how much profit the business can generate after deducting all expenses.

Decision-making data - Investors and managers use information from this statement to make business decisions, such as additional investments, borrowing, or strategic adjustments.

Future planning - Data from the profit and loss statement helps identify the strengths and weaknesses of the business, leading to better strategic development.

What are the components of a profit and loss statement?

Revenue (Revenue)

• Main Revenue (Sale) - Comes from selling products or services. This is the primary cash inflow for the business.
• Other Revenue (Other Revenue) - From other activities, such as interest from deposits, rental income, or profit sharing.

Cost of Goods Sold (Cost of Goods Sold)

Represents the expenses related to producing goods or providing services, including raw materials, labor, and other production-related costs.

Gross Profit (Gross Profit)

This is Revenue – Cost of Goods Sold, indicating how much the business can set prices above costs.

Operating Expenses (Operating Expenses)

• Selling Expenses - Advertising, marketing, transportation, commissions.
• Administrative Expenses - Office costs, management salaries, training.

Earnings Before Tax (EBT - Earnings Before Tax)

Derived from Operating Profit – Financial Expenses. This is the profit before taxes.

Net Profit (Net Profit)

The final profit the business earns after deducting all expenses and taxes.

Types of profit and loss statements

1. Report Format (Report Form)

Read from top to bottom, structured into 3 parts:

First part - Header with 3 lines (Business Name, “Profit and Loss Statement,” and the period)

Second part - Shows total revenue. If there is one or more items, sum them up.

Third part - Shows total expenses. If there is one or more items, sum them up.

Finally, calculate the difference: if revenue > expenses, there is a profit; if revenue < expenses, there is a loss.

Advantages:

• Easy to read, key figures are clear
• Emphasizes overall operational performance
• Can be used for effective analysis

2. Account Format (Account Form)

Structured like a T-account, with expenses on the left and revenue on the right.

• Both sides must have equal totals
• Based on the fundamental accounting principle of balance

Advantages:

• Clearly and comprehensively displays data
• Has a fixed format, making it convenient to prepare
• Recognized by government agencies and regulatory bodies

Example calculation of a profit and loss statement

To clarify, let’s look at an example of profit at each step:

Sales and service revenue 1,000,000 THB

Minus Cost of Goods Sold 400,000 THB

= Gross Profit 600,000 THB

Add Other Revenue 50,000 THB

Minus Selling Expenses 100,000 THB

Minus Administrative Expenses 150,000 THB

= Earnings Before Interest and Taxes (EBIT) 400,000 THB

Minus Financial Expenses 30,000 THB

= Earnings Before Tax (EBT) 370,000 THB

Minus Tax Expenses 55,500 THB

= Net Profit 314,500 THB

Meaning of each profit stage

Gross Profit shows how much margin your product or service has in setting prices. A high margin indicates prices are well above costs; a low margin suggests reviewing costs or pricing strategies.

Operating Profit indicates how well cost management, purchasing, advertising, and business operations are performing.

Net Profit is the most critical figure because it reflects the actual profit after all expenses are deducted. Most investors focus on this number first.

How to read the profit and loss statement for maximum benefit

Step 1: Check the period

First, determine whether it’s a monthly, quarterly, or annual report, as different periods affect analysis. For example, annual statements give a broader overview than monthly ones.

Step 2: Get an overall picture

Check whether the business is profitable or incurring losses. This basic information indicates the general viability of the business.

Step 3: Analyze revenue sources

Identify where revenue comes from. For example, if a bank’s main income is from interest and also from investment sales, fees, and other income, you’ll know whether the business has diversified income sources.

Step 4: Examine expenses

Identify where most expenses originate. High expenses may require efficiency improvements.

Step 5: Compare with previous years

See whether profits have increased or decreased compared to prior periods. This comparison helps identify business trends.

Important points to remember

The profit and loss statement is a powerful tool but should not be used alone for investment decisions or business evaluation. Consider other factors such as:

• Business nature and industry position
• Quality of management team
• Competitive environment
• Growth opportunities
• Balance sheet (Balance Sheet) and cash flow
• Technical factors and market trends

Summary

The profit and loss statement illustrates the pattern of profitability over a specified period. It indicates whether the business is succeeding or stagnating. Understanding and correctly interpreting the profit and loss statement is a fundamental skill for investors, analysts, and managers. Once you understand how to calculate and analyze it, you can evaluate a business’s profitability more intelligently and effectively.