What is Profit and Loss (P&L) and how is it calculated?

If you take a deeper look into what P & L is, you will find out that it is widely used in business management and business economics. However, to make the most of it, the first step is to understand the meaning of P & L.

It is also possible to apply it to other areas, such as cryptocurrency trading. In fact, there is a specific function on Young Platform that automatically counts the profit and loss on all trades made. Let’s find out together how P & L is calculated and why it is important in managing our finances.

What P & L is in finance

In any sort of economic activity, it is good practice to record income and expenditure, i.e. what are the costs and the gains of our activities are. The difference between income and expenditure flows determines net profit, which can of course also be negative. A simple but effective tool that is widely used for this purpose in business economics and management is Profit&Loss (P & L):

Starting from a basis of business economics and the original meaning of P & L, you can also apply this concept to cryptocurrencies. Indeed, it will allow you to understand how your assets are performing and possibly how to optimise your operations.

With regard to the activity of buying and selling cryptocurrencies, the variables to be taken into account (in addition to the risks arising from market fluctuations) are the following:

How is P & L calculated?

Now that you understand what P & L is, and what variables are to be taken into account to calculate it, the next step is to understand how to write a report or statement and thus how P & L is calculated.

There are mainly two mutually exclusive Profit and Loss methodologies applicable to any economic activity, including cryptocurrencies:

The choice of which methodology to adopt is not trivial and depends on many factors. Usually, smaller companies use the cash principle because it is easier to manage, while larger companies use the accrual principle because they have more resources to devote to accounting. Similarly within trading, or concerning cryptocurrencies in general, it makes more sense to use the cash principle if the activities carried out are few and simple. Conversely, if your activities are more varied and more complex, it could make sense to use the accrual principle.

How to read P & L in a financial statement

It is not enough to know the principle behind which P & L calculation is carried out. Conducting a correct reading and interpretation of a P & L statement is equally important. It allows you to know how things are going, so that you can make any improvements and especially, you can understand in which sections you need to intervene.

A financial statement is mainly composed of values referring to comparable time periods. For example, in trading it is useful to compare P & L from year to year, or from quarter to quarter, so that you can immediately see if your strategy requires balancing.

Here are the basic steps to read a P & L statement  correctly:

Here is an example of a P & L statement, a simplified profit and loss account:

P & L on Young Platform

The meaning of P & L in trading is similar to that found in business economics, but it is applied in a different, much more specific way. In this regard, on the Young Platform exchange you have the opportunity to take advantage of the Profit and Loss functionality free of charge, in the Analytics section. 

This type of P/L only concerns your buying and selling transactions on Young Platform and allows you to understand, in real time, what the performance of your cryptocurrencies is and to monitor the performance of your assets, so as to help you with your strategies.

The calculation of the P & L in Young Platform trading is done automatically, based on two pieces of data: 

This is the formula: %P&L = (Portfolio Value – Purchase Price) / Purchase Price 

Another interesting figure is the average purchase price of a cryptocurrency, i.e. the average of all purchase prices of a single coin. 

For example, by setting up recurring purchase for Ethereum on Young Platform, you may have bought ETH 3 times in the last 3 weeks; the P/L will then calculate the average of the 3 prices. Let’s say the first purchase was at €1500, the second at €1800 and the third at €2000, during a period of a strong uptrend.

Average price = (1500 + 1800 + 2000) / 3 

You would have an average purchase price of €1767 (approximated by excess). If the price of Ethereum fell below this level, you would lower the average purchase price on your next purchase. If, on the other hand, the price of ETH were to rise above €1767, you would make a profit overall by selling the coins. 

In this respect, the calculation of Profit and Loss for recurring purchases over time makes it clear that the right time to invest does not exist: it is impossible to ‘time’ the market.

Now that you know the meaning of P & L (Profit and Loss), you will have realised that it can be a valuable ally in business management, but also in all those activities typical of the crypto world. The P & L calculation on Young Platform is fully automated and allows you to constantly evaluate the performance of your assets, saving you time!