Guides
Part of Building clear profit and loss forms
Worked profit and loss examples, from a clean quarter to a messy one
Profit and loss examples: one quarter shown on both cash and accrual bases, a misfiled cost, and split revenue streams, with placeholder figures throughout.
Every number on this page is invented. The figures are round, in unnamed units, and chosen only to make a pattern visible. Do not read anything below as a benchmark for any real business.
What the examples show is how the same activity can produce two different forms, and how a form can be arithmetically right and still mislead. Five of them, each a few lines long.
What to take away
- Two honest forms for the same quarter can show net profit three times apart. The basis line explains which is which.
- Revenue growing faster than profit is visible only in the percent-of-revenue column.
- Moving one cost between sections changes the gross margin and nothing else.
1. The same quarter, on two bases
An invented consultancy did the same work either way. On a cash basis, a large client paid late, after the quarter closed. On an accrual basis, the work was recognized when done.
Same quarter, two bases
Cash basis
- Revenue
- 30,000
- Direct costs
- 12,000
- Gross profit
- 18,000
- Operating expenses
- 15,000
- Net profit
- 3,000
Accrual basis
- Revenue
- 42,000
- Direct costs
- 18,000
- Gross profit
- 24,000
- Operating expenses
- 15,000
- Net profit
- 9,000
Same quarter, two bases
Cash basis
- Revenue
- 30,000
- Direct costs
- 12,000
- Gross profit
- 18,000
- Operating expenses
- 15,000
- Net profit
- 3,000
Accrual basis
- Revenue
- 42,000
- Direct costs
- 18,000
- Gross profit
- 24,000
- Operating expenses
- 15,000
- Net profit
- 9,000
Both forms are correct. Cash tells the truth about the bank; accrual about the business. A reader who does not know the basis will conclude the firm barely broke even or had a strong quarter, and both conclusions are wrong.
The basis sits in the header of every page of the profit and loss form, so switching basis mid-year makes every comparison meaningless.
Which basis you may use for reporting is a question for your accountant. The records you have to keep either way are set out in guidance such as the UK rules on company and accounting records.
2. Bigger, not better
An invented business grew revenue by sixty percent between two years. Everyone was pleased until someone added a column.
Growth with falling efficiency
Year 1
- Net revenue
- 100,000
- Gross profit
- 60,000
- Operating expenses
- 30,000
- Operating profit
- 30,000
- Operating margin
- 30%
Year 2
- Net revenue
- 160,000
- Gross profit
- 96,000
- Operating expenses
- 56,000
- Operating profit
- 40,000
- Operating margin
- 25%
Bigger, not better
| Line | Year 1 | % of revenue | Year 2 | % of revenue |
|---|---|---|---|---|
| Net revenue | 100,000 | 100% | 160,000 | 100% |
| Direct costs | 40,000 | 40% | 64,000 | 40% |
| Gross profit | 60,000 | 60% | 96,000 | 60% |
| Operating expenses | 30,000 | 30% | 56,000 | 35% |
| Operating profit | 30,000 | 30% | 40,000 | 25% |
Operating profit rose by a third, and the percent column shows operating cost rose faster than revenue, so the business became less efficient while growing. Neither reading is wrong, but act on the second, and currency columns alone would never have shown it.
The same percent column logic drives layout rules in invoices and receipts format. Tax and totals must sit where a reader expects them.
3. One cost moves, nothing else does
An invented agency reclassified a designer's salary from operating expenses to direct costs, on the reasonable grounds that the designer's time is billed to clients.
One cost reclassified
Before
- Net revenue
- 50,000
- Direct costs
- 20,000
- Gross profit
- 30,000
- Gross margin
- 60%
- Operating profit
- 8,000
After
- Net revenue
- 50,000
- Direct costs
- 24,000
- Gross profit
- 26,000
- Gross margin
- 52%
- Operating profit
- 8,000
One cost moves
Before
- Net revenue
- 50,000
- Direct costs
- 20,000
- Gross profit
- 30,000
- Gross margin
- 60%
- Operating expenses
- 22,000
- Operating profit
- 8,000
After
- Net revenue
- 50,000
- Direct costs
- 24,000
- Gross profit
- 26,000
- Gross margin
- 52%
- Operating expenses
- 18,000
- Operating profit
- 8,000
Net result identical, but gross margin is down eight points. A July change nobody wrote down makes the margin trend show a sudden deterioration with no cause, and someone will spend a week looking for a pricing problem that does not exist.
The classification rule belongs under the form, and any change to it belongs in the version note.
4. The one-off inside the operating section
An invented firm settled a legal matter in March and booked it to professional fees, where the rest of its legal spend lives.
March loss from a one-off
- January6,000
- February6,000
- March-6,000
- April6,000
One-off inside operating
| Month | Revenue | Operating expenses | Operating profit |
|---|---|---|---|
| January | 20,000 | 14,000 | 6,000 |
| February | 20,000 | 14,000 | 6,000 |
| March | 20,000 | 26,000 | (6,000) |
| April | 20,000 | 14,000 | 6,000 |
March shows a loss. The business did not have a bad March; it had a normal March and a one-off. Kept in the operating section, the item breaks the trend and the quarter's operating margin.
Moved below the line as a non-recurring item, March looks like every other month and the settlement is still fully visible, in the right place. The rule: if it will not recur, it does not belong in the section meant to show the recurring shape of the business.
5. Two streams, one blended margin
An invented business sells a high-margin service and a low-margin product. The blended margin looks fine until the product line grows.
Blended margin falls as mix shifts
Period 1
- Service revenue
- 50,000
- Product revenue
- 50,000
- Total gross profit
- 45,000
- Blended margin
- 45%
Period 2
- Service revenue
- 50,000
- Product revenue
- 100,000
- Total gross profit
- 55,000
- Blended margin
- 37%
Two streams, blended margin
| Stream | Revenue | Gross profit | Margin |
|---|---|---|---|
| Service | 50,000 | 35,000 | 70% |
| Product | 50,000 | 10,000 | 20% |
| Total, period 1 | 100,000 | 45,000 | 45% |
Product sales double in the next period. Service is unchanged.
Two streams, blended margin
| Stream | Revenue | Gross profit | Margin |
|---|---|---|---|
| Service | 50,000 | 35,000 | 70% |
| Product | 100,000 | 20,000 | 20% |
| Total, period 2 | 150,000 | 55,000 | 37% |
Revenue up by half and gross profit up, but blended margin fell eight points. Neither stream went wrong.
A single revenue line and one direct cost line would show only the falling margin. You would hunt for a cost problem. One line per stream shows a mix change. That is a pricing and strategy question, not cost.
Where the two streams are sold through different documents, the shift shows there first. The accepted quotes for the product line and the staged proposals for the service line move months before the form does.
What the five have in common
- The arithmetic was never the problem.Every form above adds up.
- The layout carried the meaning.Basis in the header, a percent column, a written classification rule, a below-the-line section, a line per stream. Each is a formatting choice that changes what a reader concludes.
- The fix was one added line or one moved line.Not a new system.
Trying it on your own figures
Take your last three months and do three things. Add a percent-of-revenue column. Split revenue by stream if you have more than one. Move anything that will not recur below operating profit.
Then look at the gross margin trend again. If it changed shape, the form was hiding something. The figures you start from should tie back to what was actually invoiced, so the invoicing records need to be clean before the form can be.
