What is Profit or Loss?

Explanation of profit or loss

Profit or loss is one of the primary measures of financial performance reported in the statement of profit or loss. It reflects the income earned and expenses incurred during an accounting period, showing whether an entity has generated a profit or made a loss from its activities.

Income typically includes revenue and gains, while expenses include operating costs, finance costs, depreciation and taxation where applicable. Items that accounting standards require to be recognised in other comprehensive income are excluded from this measure because they are reported separately.

Under UK accounting standards, including FRS 102, and under IFRS through IAS 1 Presentation of Financial Statements, profit or loss forms a key component of an entity’s financial statements and provides stakeholders with an indication of financial performance over a reporting period.

Key characteristics of profit or loss

Key characteristics of Profit or Loss include:

• It represents income less expenses for a reporting period.
• It excludes items recognised in other comprehensive income.
• It may result in either a profit or a loss.
• It is reported in the statement of profit or loss.
• It is a key measure of an entity’s financial performance.

How profit or loss works

• Income earned during the reporting period is recognised.
• Expenses incurred during the same period are recognised.
• Income and expenses are matched in accordance with the applicable accounting framework.
• The difference between total income and total expenses is reported as profit or loss, excluding other comprehensive income.

Example of profit or loss in practice

A UK consultancy earns £2 million in revenue during the year and incurs £1.6 million in operating expenses, finance costs and tax. After deducting these expenses, it reports a profit of £400,000 in its statement of profit or loss. Any items recognised in other comprehensive income are reported separately.

Related terms

• Income
• Expenses
• Revenue
• Other comprehensive income
• Statement of profit or loss
• Financial statements
• Net profit
• Comprehensive income

Common misconceptions about profit or loss

• Profit or loss does not include items recognised in other comprehensive income.
• A profitable business does not necessarily generate positive cash flow.
• Profit and revenue are not the same measure.

Profit or loss questions

What is profit or loss in accounting?

Profit or loss is the difference between an entity’s income and expenses during a reporting period, excluding items recognised in other comprehensive income.

What is included in profit or loss?

It generally includes revenue, gains and recognised expenses such as operating costs, depreciation, finance costs and taxation, depending on the applicable accounting framework.

What is the difference between profit or loss and comprehensive income?

Profit or loss excludes items recognised in other comprehensive income, whereas comprehensive income includes both profit or loss and other comprehensive income.

Where is profit or loss reported?

It is reported in the statement of profit or loss, which forms part of an entity’s financial statements.