What is a Profit and Loss Statement?
A profit and loss statement is a financial report that records and summarizes a company’s revenue, cost, and expenses in a specific period of time. It may be produced monthly, quarterly, or annually. This financial statement is sometimes referred to as income statement, statement of operations, earnings statement, or expense statement. The five main components of a profit and loss statement are as follows: revenue, cost of goods sold, gross profit, expenses, and net profit.
How to Create a Profit and Loss Statement
Even for small businesses and for those who are self-employed, a profit and loss statement is a must-have. It shows a company’s ability to generate sales, manage expenses, and turn revenue into profit. To aid you in making a profit and loss statement, we have provided you five easy steps below.
1. Specify the Time Period
Before creating a profit and loss statement, you first have to specify the time period it will cover. It is ideal to make a financial statement which only covers a few months of business operation for you to determine if there are significant changes at the end of the year. Moreover, if a profit and loss statement covers more than a 12-month period, there will be a need to include too much data in your financial statement.
2. Gather Financial Records
Whether you are creating a restaurant profit and loss statement, profit and loss statement for small business, or profit and loss statement for self-employed, gathering financial records is an important step in creating an accurate and complete financial statement. You need to have raw figures of the sales or income the business have had over the period your profit and loss statement will cover. Also, it will help you keep track of the cash flow of your business. To record your figures, you may use Microsoft Excel or download a blank profit and loss statement online.
3. Calculate Total Sales
Now that you have the financial records at hand, you can already calculate the total sales or revenue of your business. Revenue is the total amount of income generated from selling goods or providing services to clients or customers. You can categorize the information in your sample statement to indicate the different sources of the company’s total sales. Keep in mind that you still have to subtract the total expenses from the total income.
4. Calculate Total Expenses
In calculating the total expenses, you have to find out the cost of goods sold first – this is the amount of money that the company spent for the production of goods. After which, compute the operating expenses, this includes the payroll, travel, training, rent, purchased equipment, utilities, depreciation, and amortization. You should also include the taxes, interest, and the owner’s draw in calculating the total expenses.
5. Determine Net Income
Now that you have a complete list of figures, subtract your total expenses from your total income for you to come up with a net income. Net profit or net income is the total earning of a company or a businessman after subtracting all the expenses incurred. The result of the computation will show you if the company has a profit or a loss. Now, you have to do a profit and loss statement analysis to help you determine if there is a need for some adjustments to increase profits for a healthy surplus.