28/01/2026
Profit and Loss
A Profit and Loss Account (also called Profit and Loss Statement, Income Statement, or Statement of Profit or Loss) is one of the main financial statements of a business. It shows how much revenue (income) a company generated during a specific period (e.g., a month, quarter, or full year), subtracts all the costs and expenses involved in running the business, and reveals the resulting net profit (or net loss).
In simple terms:
Revenue > Expenses โ Profit
Expenses > Revenue โ Loss
This account helps business owners, managers, investors, and lenders understand whether the business is making money, where money is being spent, and how efficiently it is operating.
Key Components of a Profit and Loss Account
The typical structure follows this logical flow (top to bottom):
Revenue / Sales / Turnover
Total income from core business activities (e.g., selling goods or services).
Cost of Goods Sold (COGS) or Cost of Sales
Direct costs of producing or purchasing the goods sold (e.g., raw materials, direct labour, carriage inwards).
Gross Profit
= Revenue โ COGS
Shows profitability before operating expenses.
Operating Expenses (or Indirect Expenses)
Selling & distribution expenses
Administrative expenses (salaries, rent, utilities, office costs)
Other operating costs
Operating Profit (Profit from Operations / EBIT โ Earnings Before Interest & Tax)
= Gross Profit โ Operating Expenses
Non-operating items (if any)
Other income (e.g., interest received, rent received)
Finance costs (interest paid on loans)
Profit Before Tax
Taxation (Income tax expense)
Net Profit (or Net Income / Profit for the Period / Bottom Line)
= Profit Before Tax โ Tax
This is the final figure that shows the true profit after all deductions.
Simple Example of a Profit and Loss Account
(For a small business in Nigeria for the year ended 31 December 2025 โ amounts in NGN)
Revenue
Sales โฆ15,000,000
Cost of Goods Sold
Opening stock โฆ2,000,000
Add: Purchases โฆ8,500,000
Add: Carriage inwards โฆ300,000
Less: Closing stock โฆ(1,800,000)
Cost of Goods Sold โฆ(9,000,000)
Gross Profit โฆ6,000,000
Operating Expenses
Salaries & wages โฆ2,200,000
Rent & utilities โฆ800,000
Advertising & marketing โฆ500,000
Depreciation โฆ300,000
Other expenses โฆ400,000
Total Operating Expenses โฆ(4,200,000)
Operating Profit โฆ1,800,000
Other Income
Interest received โฆ50,000
Finance Costs
Bank interest paid โฆ(150,000)
Profit Before Tax โฆ1,700,000
Taxation (e.g., 30%) โฆ(510,000)
Net Profit for the Year โฆ1,190,000
This net profit can be distributed (e.g., dividends), retained in the business, or used to pay off debts.
Why Is the Profit and Loss Account Important?
Measures profitability and performance over time.
Helps in budgeting, forecasting, and decision-making.
Required for tax filing (e.g., with FIRS in Nigeria).
Used by banks for loans and by investors to evaluate the business.
In Nigeria, many small businesses prepare it in a vertical format (as shown above), while larger companies may follow IFRS (International Financial Reporting Standards) or Nigerian GAAP requirements, sometimes including "Other Comprehensive Income."
If you're preparing one for your business, studying accounting, or need a specific format/example (e.g., for a sole trader, partnership, or limited company), let me know more details!
Financial Accounting Government and Financial Accounting
