candy shelf with half-filled jars by Leif Norman

How to read Financial Statements (Part 1 – Basic Profit & Loss)

So you’re at the board meeting of your favourite organization and the treasurer passes around a copy of the latest financial statements. Everyone gives them a respectable two minutes of silence, a few nods of the head, and then looks expectantly at the treasurer, hoping she will say everything is fine because no one wants to admit that they aren’t exactly sure what they are looking at.

It happens all the time. We aren’t taught about financial statements is school. We don’t need them to run our households. So where are we supposed to learn about these highly specialized documents?

Well, here, for starts.

In a standard set of financial statements, there are three main documents:

  • the Profit & Loss Statement (a.k.a. the Income Statement);
  • the Balance Sheet (also known at the Statement of Financial Position); and
  • the Statement of Cash Flows.

Let’s start with the Profit & Loss Statement, because it is usually the easiest of the three to understand.

The Profit & Loss Statement (or P&L) tells you how much money you have earned (revenue) and how much it cost to earn it (expenses). The revenues are at the top and the expenses are at the bottom. If you’ve earned more money than you’ve spent, you have a profit. And if you’ve spent more than you’ve earned, you’ve got a loss. That’s pretty much it. Easy-peasy.

Here is a very basic example of a P&L:

example of a very basic profit and loss statement

These guys are in a profit position. If they had a loss, the bottom number would be in brackets.

But your board reports are a bit more complicated, right? They have lots more types of revenues and expenses and likely a few extra columns. We’ll tackle a more complex P&L in Part 2.

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