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What is a Profit and Loss Statement?

What is a Profit and Loss Statement?

A Profit and Loss statement is calculated by totaling all of a businesses revenue sources and deducting from all of businesses expenses that are related to revenue. Profit and Loss Statement is also known as an Income statement that determines the company’s financial performance for a specific period of time. 

What does a profit and loss statement tell you?

A profit and loss statement is a company’s financial report summarizing the costs, revenues and expenses a company incurs for a specific period. Generally, the Income statement is prepared monthly, quarterly and yearly. 

This statement demonstrates your company’s ability to generate profits. It shows the sales you’re earning and how you’re managing your expenses. 

Also Read – Why is Accounting Important?

What do I need to prepare a Profit and Loss Statement?

To prepare Profit/Loss statements you need the following financial information related to your business:

  • Banking Transactions:

To create an Income statement, you will require your banking records, including all transactions related to your business bank account and credit cards records outlining your business purchases. 

  • Cash Transactions:

Before preparing your profit/loss statement, you’ll need to gather all your receipts related to cash purchases for your business. You can include petty cash transactions, if it applies to your company. 

  • Income Listings:

To create a profit and Loss statement, you’ll need an account of all your income expenses including check, cash, credit payments and online payments your client has made to your business. 

How to Prepare Profit and Loss Statement:

The basic equation for calculating and preparing Income statement is:

Profit = Revenue (-) Expenses

The following are the steps in preparing accurate profit and loss statement for your small business using the above equation in detail:

  • Show Net Income:

You need to show the net income generated by your business called “sales”. You may also breakdown your income sources in sub categories to show your different income sources.

  • Itemize expenses:

Itemize your business expenses for the period you’re reporting on. You’ll want to show your expenses as a percentage of your sales. 

  • Calculate EBITDA:

EBITDA is commonly shortened for calculating your earnings before Interest, taxes, depreciation and amortization. This will show the difference between sales and expenses as earnings. 

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  • Account for Interest:

If you’ve any business debt, you’ll need to account for business payments as part of the profit and loss statement. Subtract your business debt for the year from your EBITDA. 

  • List Taxes:

Now, you need to list down the taxes and subtract it from your revenue. 

  • Show Depreciation:

Show total depreciation and amortization for your business for the year, and subtract that from your revenue. 

  • Calculate Profit:

After the above calculations, you will be left with net earnings. This will determine your profit or loss. 

Why is a Profit/Loss Statement useful for business?

A profit or loss statement is useful for a business because it shows the profit or loss generated by the business for a specified time period. The profit and loss statement is fundamentally financial statements for accounting purposes along with balance sheets and cash flow statements. All together, the financial statement determines the company’s new business plan. 

A profit and loss statement is a useful business document because it can help you analyze the financial health of the business. It compares the money going out of the business to the money coming in the business, so that it can show you areas to cut back costs and increase your profits. 

Profit and loss statements can help you and your accountant to prepare your taxes. It will help you to compile your income and expenses for tax filing purposes.