What is P&L really? The ultimate guide to understanding profit and loss statements

If you are an investor or an entrepreneur still confused about the (Profit and Loss Statement) or simply called P&L, and want to understand what the numbers on the paper tell you, today we won’t go into complicated details. Instead, we’ll clarify this concept clearly.

The Profit and Loss Statement (P&L) is a tool to measure business success

P&L or Profit and Loss Statement is not an ordinary document. It is one of the most important financial reports because it tells us 3 key things:

• How much revenue the business has
• How much it has spent
• How much profit or loss remains

Through the P&L, managers and investors will know whether the business is strong or in trouble, and how to adjust operational strategies to strengthen profits.

The main formula is simple: Revenue - Expenses = Profit (or Loss)

The core of the P&L lies in this basic formula:

Total Revenue (Total Revenue) - Total Expenses (Total Expenses) = Profit or Loss (Profit or Loss)

Each component means:

• Total Revenue: All money coming from sales of goods/services
• Total Expenses: All money spent on operations (such as rent, advertising, salaries)
• Profit: When revenue exceeds expenses
• Loss: When expenses exceed revenue

Digging deeper: different profit levels convey different meanings

A real P&L statement shows multiple profit levels, not just raw numbers, such as:

Each level has a specific meaning:

Gross Profit (Gross Profit)

Indicates how much the business can set prices above costs. If this level is low, it might mean high costs or low selling prices.

Operating Profit (Operating Profit)

Shows how well the core business is managed. A high level indicates good operational strategy.

Net Profit (Net Profit)

“The real number” — what remains for shareholders after all deductions.

P&L has 2 formats: choose whichever you prefer, but the data is the same

1. Report Form P&L(

This format is arranged from top to bottom, clear and easy to read

• Easy to read
• Suitable for presentations
• Good for those unfamiliar with accounting

) 2. Account Form P&L### This format shows as a T-account: expenses on the left, income on the right

• Detailed and intensive
• Suitable for accountants and experts
• Provides clear cash flow understanding

Why is P&L important? 5 reasons you need to know

1. Measure financial performance - P&L provides an overall picture of how well the business delivers results

2. Decision-making data - Investors use P&L to decide whether to invest; managers use it to choose strategies

3. Indicate profitability ability - Looking at P&L reveals whether the business is efficient in generating profit

4. Assist in strategic planning - Analyzing P&L helps to adapt, such as reducing certain expenses or increasing revenue

5. Track progress - Comparing P&L across different periods (monthly, quarterly, yearly) shows trends

How to read a P&L correctly: 4 steps

( Step 1: Check the period Before reading the P&L, see which period the report covers )monthly, quarterly, or yearly( because it affects analysis

Example: P&L for the year ending December 31, 2023 )full-year data###

( Step 2: Look at the total - profit or loss? First, check the net profit figure. If the P&L shows a positive number, the business is profitable; if negative, it is losing money.

) Step 3: Track revenue sources Review where the revenue comes from, which parts are the largest proportion. This indicates what the business relies on most.

Example: In 2022, the Bank of Thailand’s income came from interest received, gains from securities sales, fees, etc.

( Step 4: Analyze expenses See where the money goes, which areas have the highest spending. This helps identify opportunities for cost savings.

Example: Employee expenses, other expenses, losses from securities sales.

Caution: Don’t make investment decisions based solely on P&L

P&L is a useful tool but not the only one. When considering investing or choosing a business, also look at:

• Business characteristics and trends
• Quality and experience of the management team
• Technical data and innovation
• Market conditions and industry trends
• Other factors supporting growth

The real story

P&L is not as complicated as it seems. It simply tells you “How much money the business makes, how much it spends, and what profit remains.” Once you understand the purpose of the P&L, reading it becomes much easier and will help you make smarter investment or business management decisions.