A Beginner’s Guide to a Profit and Loss Report
The profit and loss ((P&L) report is a financial statement that summarizes the total income and total expenses of a business in a specific period of time. It is also known as the income statement or the statement of operations.
The goal of a P&L report is to measure the profits by excluding the expenses from the income and provide an overview of the financial health of the business.
What this article covers:
- What Is a P&L Report?
- What Does the Profit and Loss Statement Show?
- Components of a Profit and Loss Report
- How Do I Write a Profit and Loss Statement?
What Is a P&L Report?
The profit and loss statements contain summarized information about revenue and expenses. Based on the standard operating procedure of a business, these statements are generated on a weekly, monthly, quarterly or annual basis.
The basic formula of a P&L report is:
Revenue – Expenses = Profits
What Does the Profit and Loss Statement Show?
The profit and loss report is an important financial statement used by business owners and accountants. The report shows information about the net profit based on your revenues and expenses. It details the ability of a business to manage its profits by cutting costs and driving revenue.
The P&L report also allows you to investigate revenue and expense trends, cash flow, net income and overall profitability – to then allocate resources and budgets accordingly.
Another reason to generate a profit and loss report is because it’s required by the IRS to assess taxes on the business profits.
Components of a Profit and Loss Report
1. Revenue: This entry represents the net sales or turnover during the accounting period. It includes the revenue earned from the primary business activity of the entity along with the non-operating revenue and gains on the sale of long-term business assets.
2. Cost of Goods Sold: It represents the cost of products and services.
3. Gross Profit: Also known as gross income or gross margin, the gross profit is net revenue excluding costs of sales.
4. Operating Expenses: Operating expenses are administrative, general and selling expenses that are related to running the business for a specific period of time. This includes rental expenses, payroll, utilities and any other expense required to operate the business. Also included are non-cash expenses such as depreciation.
5. Operating income: It refers to earnings before taxes, depreciation, interest and authorization. Deduct operating expenses from your gross profit to calculate operating income.
6. Net Profit: It is the total amount earned after deducting the expenses. To calculate net profit, subtract the total expenses from your gross profit.
How to Calculate Profit
To find the net profit (or net loss) of your business, here are a few simple steps.
- Gross Profit = Net Sales – Cost of Sales
- Net Operating Profit = Gross Profit – Operating Expense
- Net Profit before Taxes = Net Operating Profit + Other Income − Other Expense
- Net Profit (or Loss) = Net Profit before Taxes − Income Taxes
Profit and Loss Report Sample
A P&L starts with a header which contains the name of your business and the accounting period.
This is followed by:
- Net Profit
Here is a sample Profit and Loss Account.
How Do I Write a Profit and Loss Statement?
There are two basic methods of creating a profit and loss report manually.
Primarily used by service-based industries and small businesses, the single-step method determines net income by subtracting expenses and losses from revenue and gains. It uses a single subtotal for all revenue line items and single subtotal for all expense items. The net gain or loss appears at the bottom of the report.
Net income = (Revenue + Gains) – (Expenses + Losses)
This income statement, however, does not provide expense breakdown by department or gross margin calculations.
An alternative to the single-step method, the multi-step profit and loss statement separates the operating revenue and operating expenses from other revenue and expenses. This is done to calculate the gross profit. This method is better suited for inventory-based businesses.
The three-step process of the multi-step method are:
- The gross profit is calculated by subtracting the cost of goods sold from the net sales.
- Operating income is calculated by subtracting operating expenses from gross profit.
- The net amount of non-operating revenues and gains is combined with non-operating expenses and losses to calculate net income.
Instead of manually creating a P&L report, you can use an online accounting software to streamline the process. The detailed breakdown of profits and losses in the financial reports will give you the full picture when it comes to the health of your business.