Reading the accounts
Income statement
Also called Profit and loss or P&L
The statement showing revenue, costs and profit over a period.
How it works
It reads top to bottom: revenue, minus the cost of producing it, minus operating expenses, minus interest and tax, arriving at net income.
Each subtraction produces a different profit measure, and each answers a different question — gross profit is about product economics, operating profit about the business, net income about what is left for shareholders.
Where it misleads people
The income statement is the most accrual-based and therefore the most open to judgement. Revenue can be recognised before cash arrives and costs deferred, which is why the cash flow statement is the cross-check.
Related terms
- RevenueThe total value of goods and services a company sold in a period, before any costs.
- Gross marginWhat proportion of revenue is left after the direct cost of producing what was sold.
- Operating incomeProfit from the core business, before interest and tax.
- Net incomeWhat is left after every cost, including interest and tax — the profit belonging to shareholders.
- Cash flow statementThe statement tracking actual cash moving in and out, split into operating, investing and financing.
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