How to Calculate Profit and Loss Account: Preparing Income Statements
The profit and loss statement is calculated by totaling all of a business’s revenue sources and subtracting from that all the business’s expenses that are related to revenue. The profit and loss statement, also called an income statement, details a company’s financial performance for a specific period of time.
Here are the topics you’ll need to cover to prepare a profit and loss statement:
What Does a Profit and Loss Statement Tell You?
A profit and loss statement is a financial report summarizing the revenues, costs and expenses a company incurs for a specific period. Usually, the profit and loss account is prepared monthly, quarterly or annually.
The profit and loss statement demonstrates your business’s ability to generate profits. It shows the sales you’re earning and how you’re managing your expenses.
What Do I Need to Prepare a Profit and Loss Statement?
To create a profit and loss statement, you’ll need the following financial information related to your business:
To create a profit and loss statement, you’ll need your banking records, including listings of all the transactions related to your business bank accounts and credit card records outlining your business purchases.
Before preparing your profit and loss statement, you’ll need to gather all receipts related to cash purchases for your business. Include petty cash transactions, as well, if it applies to your company.
To create a profit and loss statement, you’ll need an account of all your income sources, including cash, check, credit and online payments your clients have made to your business.
How to Prepare a Profit and Loss Statement
To prepare a profit and loss statement, you’ll essentially be solving the basic equation for calculating profit:
Profit = Revenues – Expenses
Here are the steps to prepare an accurate profit and loss statement for your small business using the equation above, in greater detail:
Show Net Income
Show the net income generated by your business, typically titled “Sales”. If it’s helpful, you can then further break down your income into subsections, to show your different income sources.
Itemize all your business expenses for the period you’re reporting on. You’ll want to show your expenses as a percentage of Sales.
Calculate your earnings before interest, taxes depreciation and amortization, commonly shortened to EBITDA. This will show the difference between Sales and Expenses As Earnings.
Account for Interest
If you have any business debt, you’ll need to account for your interest payments as part of the profit and loss statement. To do so, subtract your business debt for the year from your EBITDA.
Next you’ll need to list your taxes on net income, and subtract it from your revenue.
Show the total depreciation and amortization for your business for the year, and subtract that from your revenue.
After the above calculations, you’ll be left with is your net earnings, or the profits generated by your business. Hopefully, you’ll report a profit, not a loss.
Need more guidance preparing your profit and loss statement? Download this easy-to-use profit and loss statement template offered by Chase Bank.
Why Is a Profit and Loss Statement Useful for Business?
A profit and loss statement is useful for small businesses because it shows the profit (or loss) generated by the company for a specific period of time. The profit and loss statement is one of the fundamental financial statements for accounting, along with the balance sheet and cash flow statement. Together, forecasts of the three financial statements serve as a foundation for a new company’s business plan.
A profits and loss statement is a useful business document because it can help you analyze the financial health of your business. It compares the money going out of your business to the money coming into it, and so it can show you areas where you can cut back costs to increase your profits.
Profit and loss statements can help you or your accountant prepare your taxes. By preparing a profit and loss statement for the full fiscal year, you’ll have a useful document that will help you compile your income and expenses for your tax filing.