A statement of profit or loss is a financial statement that shows the financial performance of a business over a particular period of time.
→ It shows the revenue earned by the business.
→ It shows the costs and expenses incurred.
→ It calculates the profit or loss for the year.
→ It helps owners and managers assess business performance.
→ It provides information to investors, lenders and other stakeholders.
Purpose
→ Measure profitability — shows whether the business has made a profit or loss.
→ Assess performance — allows profit to be compared with previous years.
→ Support decision-making — managers can identify areas where costs are increasing or revenue is falling.
→ Control costs — high expenses can be identified and investigated.
→ Help investors and lenders — profitability provides information about the financial performance of the business.
→ Calculate retained earnings — shows how much profit remains in the business after dividends.
Important point
A statement of profit or loss covers a period of time, such as:
→ Year ended 31 December 2026
This is different from a statement of financial position, which shows the financial position at a particular date.
Contents of a Statement of Profit or Loss
A typical statement can be structured as:
Revenue
↓
Less: Cost of sales
↓
Gross profit
↓
Less: Expenses
↓
Profit from operations
↓
Less: Taxation
↓
Profit for the year
↓
Less: Dividends
↓
Retained earnings
Revenue
Revenue is the income earned from the ordinary activities of the business, usually from selling goods or providing services.
For a business selling goods:
Revenue = Selling price × Quantity sold
Example
A business sells 5,000 units at $20 each.
Revenue = 5,000 × $20 = $100,000
→ Revenue is recorded before deducting the costs of making or purchasing the goods.
Cost of Sales
Cost of sales is the cost of the goods that have actually been sold during the accounting period.
For a trading business:
Cost of sales = Opening inventory + Purchases − Closing inventory
Example
→ Opening inventory = $20,000
→ Purchases = $60,000
→ Closing inventory = $15,000
Cost of sales = $20,000 + $60,000 − $15,000
Cost of sales = $65,000
→ Closing inventory is deducted because these goods have not yet been sold.
Gross Profit
Gross profit is the profit made from the buying and selling of goods before operating expenses are deducted.
Gross profit = Revenue − Cost of sales
Example
→ Revenue = $100,000
→ Cost of sales = $65,000
Gross profit = $100,000 − $65,000 = $35,000
Gross profit margin
The gross profit margin measures gross profit as a percentage of revenue.
Gross profit margin = (Gross profit ÷ Revenue) × 100
→ A higher gross profit margin means the business is retaining more of its revenue after covering the cost of goods sold.
Expenses
Expenses are the costs incurred in running the business that are not included in cost of sales.
Examples:
→ Rent
→ Salaries and wages
→ Advertising
→ Insurance
→ Electricity
→ Depreciation
→ Distribution costs
→ Administration costs
Example
A business has:
→ Gross profit = $35,000
→ Rent = $5,000
→ Salaries = $8,000
→ Advertising = $2,000
Total expenses:
$5,000 + $8,000 + $2,000 = $15,000
Profit from Operations
Profit from operations, also called operating profit, is the profit remaining after operating expenses have been deducted from gross profit.
Operating profit = Gross profit − Expenses
Example
→ Gross profit = $35,000
→ Expenses = $15,000
Operating profit = $35,000 − $15,000 = $20,000
Operating profit shows how profitable the main operations of the business have been.
Taxation
Taxation is the amount of tax charged on the business’s taxable profit.
→ Tax is deducted after calculating profit from operations in the simplified statement format used here.
Profit before tax − Taxation = Profit for the year
Example
→ Profit from operations = $20,000
→ Taxation = $4,000
Profit for the year = $16,000
Profit for the Year
Profit for the year is the profit remaining after taxation.
Profit for the year = Profit from operations − Taxation
Example
→ Operating profit = $20,000
→ Tax = $4,000
Profit for the year = $16,000
This is the amount available to the owners, subject to decisions about dividends and retained earnings.
Dividends
Dividends are payments made by a company to its shareholders from available profits.
→ Dividends provide shareholders with a return on their investment.
→ Dividends are not an operating expense.
Example
→ Profit for the year = $16,000
→ Dividends = $6,000
The company distributes $6,000 to shareholders.
Retained Earnings
Retained earnings are the part of the profit for the year that is kept in the business after dividends have been paid.
Retained earnings = Profit for the year − Dividends
Example
→ Profit for the year = $16,000
→ Dividends = $6,000
Retained earnings = $10,000
→ The $10,000 remains within the business and can be used for purposes such as expansion, purchasing assets or strengthening cash resources.
Complete Example
| Statement of Profit or Loss | $ |
|---|---|
| Revenue | 100,000 |
| Less: Cost of sales | (65,000) |
| Gross profit | 35,000 |
| Less: Expenses | (15,000) |
| Profit from operations | 20,000 |
| Less: Taxation | (4,000) |
| Profit for the year | 16,000 |
| Less: Dividends | (6,000) |
| Retained earnings | 10,000 |
Amendment of a Statement of Profit or Loss
A statement of profit or loss may need to be amended when new information is provided or an accounting error is identified.
The key is to determine which figure is affected and how it changes profit.
Example: Additional expense
Suppose the original statement shows:
→ Expenses = $15,000
An additional expense of $2,000 is identified.
→ New expenses = $17,000
→ Operating profit falls by $2,000.
If taxation is based on profit, the tax expense may also change.
Example: Additional revenue
Suppose revenue was originally $100,000 but an additional $5,000 of revenue is identified.
→ New revenue = $105,000
→ Gross profit increases by $5,000, assuming there is no additional cost of sales.
→ Operating profit also increases by $5,000, before considering any related tax effect.
Impact of a Given Change
When asked to amend a statement of profit or loss, follow the effect through the statement.
Increase in revenue
Revenue ↑ → Gross profit ↑ → Operating profit ↑ → Profit for the year ↑ → Retained earnings ↑
assuming costs, tax and dividends are unchanged.
Decrease in revenue
Revenue ↓ → Gross profit ↓ → Operating profit ↓ → Profit for the year ↓ → Retained earnings ↓
Increase in cost of sales
Cost of sales ↑ → Gross profit ↓ → Operating profit ↓ → Profit for the year ↓ → Retained earnings ↓
Decrease in cost of sales
Cost of sales ↓ → Gross profit ↑ → Operating profit ↑ → Profit for the year ↑ → Retained earnings ↑
Increase in expenses
Expenses ↑ → Operating profit ↓ → Profit for the year ↓ → Retained earnings ↓
Decrease in expenses
Expenses ↓ → Operating profit ↑ → Profit for the year ↑ → Retained earnings ↑
Increase in taxation
Taxation ↑ → Profit for the year ↓ → Retained earnings ↓
Decrease in taxation
Taxation ↓ → Profit for the year ↑ → Retained earnings ↑
Increase in dividends
Dividends ↑ → Retained earnings ↓
→ Dividends do not reduce operating profit or profit for the year.
Decrease in dividends
Dividends ↓ → Retained earnings ↑
A Useful Method for Exam Questions
When given a change, work down the statement step by step:
What changed?
↓
Which figure is directly affected?
↓
Does gross profit change?
↓
Does operating profit change?
↓
Does taxation change?
↓
Does profit for the year change?
↓
Does the change affect dividends?
↓
Calculate the new retained earnings
Key distinction
→ Revenue and cost of sales affect gross profit.
→ Operating expenses affect operating profit.
→ Taxation affects profit for the year.
→ Dividends affect retained earnings, but are not an expense.