True entrepreneurs are passionate about their work.

Unfortunately, that usually doesn't include accounting. Most entrepreneurs are not completely comfortable interpreting monthly financial reports.However, if you're a business owner, you need to be able to understand your profit and loss statements even if you hire someone to produce them for you.All Profit and Loss reports, or P & Ls, are based on a very simple formula - sales minus costs equal profit. It really is that simple.Sales are typically shown at the top of the P & L. Costs are shown next and profit is at the bottom. You may see a number of subtotals as you look down the column, but it all comes down to sales minus costs equal profit.Sales are also called revenue or income, costs may also be called expenses and profits may be referred to as net income. In fact, the P & L itself can also be called an income statement.Your company's sales may be broken into several different sources. For example a manufacturer's sales may come from customers who purchase their widgets or whatnots. These two separate product lines would then be added together in a line called total sales.There are many ways to break out costs, but once you get below the total sales line everything else you see is a cost.Let's look at the widget and whatnot manufacturer.The P & L will show the cost of the components used to make the widgets and the whatnots, the cost of the workers who assemble the widgets and whatnots and the costs of operating the production facility. These costs are referred to as cost of goods sold because they can be tied directly to the production of widgets and whatnots.A service business such as a lawn maintenance service would include the cost of the employees who do the work, fuel costs and the cost of other supplies such as fertilizer and grass seed. This is known as the cost of service.At the end of the day, sales minus cost of goods sold equal gross profit. This is the money the business earns after it subtracts the cost of delivering its product and/or services. It is also the money needed to cover the other costs associated with running the business and still generate a profit.Other costs of the business which are not associated with the production of widgets and whatnots would be the cost of salaries for the people who sell them, the cost of the accountants who produce your financial reports and even the business owner's compensation. These costs are most often referred to as selling, general and administrative costs (SG & A).And there you have it. Sales minus COGS equal gross profit and gross profit minus SG & A equal net profit. It really is that simple.If you are looking for help with your business, CCEDC partners with the Small Business Development Center at Wilkes University. To take advantage of this no-cost consulting service, contact us to make an appointment at 610-379-5000.