Section 2: Key words used in a P&L

This section will give you an overview of key words and terminology used within the P&L to break down the financial jargon used.

• Revenue/ turnover – this is your sales and can be generated from products, services or a mixture of both.
• Cost of sales / direct costs – these are costs associated in the generation of revenue – without incurring these costs you would not be able to generate revenue.
• Gross margin – this is calculated by subtracting your direct cost of sales from revenue.
• Overheads / indirect costs– there are several costs that will go into this section of the P&L and are any indirect costs that aren’t associated with the delivery of services or sale of products.
• Fixed costs: These costs are unchanged regardless of any changes to revenue
• Variable costs: These costs can change throughout the month dependant on revenue or services used.
• Depreciation: This is an accounting method used to allocate costs to the business over the life of the asset.
• Profit: this occurs when revenue exceeds your expenses
• Loss: this occurs when your expenses exceed your revenue