What Does a Profit and Loss Summary Tell You?
A profit and loss summary is a financial statement outlines revenues, costs and expenses to show how much money a company is earning and losing during a time period. They are usually created on a monthly, quarterly or annual basis.
Profit and loss summaries include three main parts:
Revenue: Revenue or income is money that the company makes from sales of their products and/or services.
Expenses: An expense is money the company paid out.
Total Income: Total income is the amount the company earned or lost while operating the business.
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How Is Profit and Loss Calculated?
One of the most important financial statements a business needs is a profit and loss statement, sometimes called an income statement. This document shows the revenues and expenses of the business and resulting profits and losses over a specific time period (month, quarter or year).
There is a simple formula for calculating a net profit and losses:
- Add up your monthly income
- Add up all your expenses
- Subtract total expenses from total income
- And the result if your profits and loss
How to Prepare a Profit & Loss Statement?
A profit and loss statement is a business report that shows the revenues and expenses and resulting profit or loss of a business over a specific time period. In some cases, this report is referred to as an income statement. These records provide insight as to whether a company can generate profit by increasing revenue, reducing costs or both.
So, how do you prepare a profit and loss statement? Here’s a simple step-by-step process.
For each row, you will have a quarterly amount then a total for the year.
Step 1: Each row will have a quarterly amount then an annual amount
Step 2: Show your business Net Income or Sales for each quarter of the year. If you wish, you can break down income into subsections to show different sources of income.
Step 3: Itemize your business expenses for each quarter. Each expense should be shown as a percentage of Sales. All expenses should be equal 100% of Sales.
Step 4: Show the difference between Sales and Expenses as Earnings. This is also referred to as EBITDA (earnings before interest, taxes, depreciation, amortization).
Step 5: Show the total interest on your business debt for the year and subtract from EBITDA.
Step 6: List (estimated) taxes on Net Income and subtract.
Step 7: Show the total depreciation and amortization for the year and subtract.
Result: This number should equal net earnings, or your business profit or loss.
How to Prepare a Projected Profit & Loss Statement?
When you’re starting a business, you don’t have the information you need to prepare a Profit & Loss Statement, so you have to make estimates. A pro forma statement, a financial statement that predicts your business’ profits and loss, is usually prepared for each month for the first year of your business. Lenders may require you to add more months or years to your projections to show the break-even point, when your company is generating positive cash flow on a consistent basis.
To create a pro forma statement:
- List all possible expenses, over-estimating to cover unpredicted costs. Don’t forget to add a category for “miscellaneous” and an amount.
- Estimate your sales for each month. Under-estimate sales, both in timing and amount.
- The difference between expenses and sales is usually negative for some time. The negative amounts should be added up to see how much capital you need to start your business.