Revenue
Revenue is the money your business makes from selling goods or services. It’s the very first line on the profit and loss statement. For example, if you sell 1,000 products for $200 each, your total revenue is $200,000.
Gross revenue vs. net revenue
Gross revenue is the total amount you made before accounting for any discounts, returns, or expenses.
Gross revenue is also known as:
- Total revenue
- Total sales
- Gross sales
Net revenue is the money you make after deducting discounts and returns. Net revenue is also known as net sales.
Net revenue = gross revenue - discounts and returns
For example, if you sold $200,000 in merchandise—your total revenue—but you ran a sale and had some returns. The sale discounts were $10,000, and there were $5,000 in returns.
Your net revenue is:
Net revenue = Gross revenue - discounts and returns
Net revenue = $200,000 - $15,000
Net revenue = $185,000
Cost of goods sold (COGS)
Cost of goods sold (COGS) are the cost of materials and labor a company uses to make a product or service. It’s also known as cost of sales. The costs can include raw materials or direct wages for employees. But also certain overhead costs, such as utilities.
Gross profit
Gross profit is the money you make from sales after subtracting your cost of goods sold.
Gross profit = net revenue - cost of goods sold
For example, you make $185,000 in net revenue, but it takes you $125,000 to make all the products.
Your gross profit is:
- Net revenue: $185,000
- Cost of goods sold: ($125,000)
- Gross profit: $60,000
Expenses
Expenses of a business include all the costs to generate revenue. COGS are expenses that show up on the top part of the P&L before gross profit. Other expenses can be operating or non-operating.
Operating expenses
Operating expenses are the costs of running your business. While COGS are for making a product, operating expenses are the costs to support that process.
Operating expenses include:
- Rent
- Marketing costs
- Salaries for admin staff
- Depreciation
- Licensing fees
Non-operating expenses
Non-operating expenses are costs not part of your core operations. These include taxes, fines, legal fees, and interest. Non-operating expenses include anything that’s unlikely to happen again. For example, losses due to shutting down a business operation.
Income
Income is how much money you make in your business. There are two key types of income—operating and net income.
Operating income
Operating income is a business's income from its core operations. It excludes non-operating expenses, such as taxes or interest expenses. This type of income measures how well a company generates money from its main business.
Operating income = Gross profit - operating expenses
For example, your business has the following operating expenses:
- Rent: $10,000
- Salaries: $5,000
- Marketing $2,500
- Total: $17,500
Your gross profit was $60,000, and thus your operating income is:
- Gross profit: $60,000
- Operating expenses: ($17,500)
- Operating income: $42,500
Net income
Net income is your bottom line—the last item on your P&L. It's the money left after subtracting all expenses.
Net income = revenue - COGS - operating expenses - non-operating expenses
Net income comes after both operating and non-operating expenses on the P&L. It’s a measure of the money left over for shareholders or owners.
For example, you have $42,500 in operating income, $2,500 in tax expenses, and $5,000 in interest expenses.
Your net income is:
- Operating income: $42,500
- Taxes: ($2,500)
- Interest expenses: ($5,000)
- Net income: $35,000
How do you create a profit and loss statement?
The P&L will include three key components—revenue, expenses, and income. There are three key steps to making a profit and loss statement.