What is a profit and loss statement?
A profit and loss statement, also known an an income statement, measures a company’s sales and expenses over a specified period of time. The function of a P&L statement is to total all sources of revenue and subtract all expenses related to the revenue. It shows a company’s financial progress during the time period being examined and can provide important information regarding revenues and expenses and whether adjustments might be necessary to recoup losses or decrease expenses. The profit and loss statement also allows outsiders to evaluate the company’s resources.
How to do a profit and loss statement step by step
The following are the basic steps in how to do a profit and loss statement:
- Prepare a table with three columns in the software program of your choice. The first column is a description of the information, the second is a list of deductions and the third is a list of additions.
- Create a title for your profit and loss statement. Put the company name on the first line, then “Profit and Loss” or “Income Statement” on the second line and the time period covered on a third line.
- Enter net sales in the first row of the profit and loss statement.
- Provide information about cost of goods sold on the next few lines. This section is only needed if the business sells tangible goods. The cost of goods sold is the beginning inventory value, minus any inventory used for personal purposes and freight, subtracted from the ending inventory value. Each of these items should be listed on its own line.
- Calculate gross margin after the cost of goods sold, if applicable. This is the net sales minus the cost of goods sold.
- List all regular expenses for the period on the following lines, including any employee and overhead costs. Add them all together to get total expenses.
- Determine operating profit on the next row of the table by subtracting total expenses from gross margin (or net sales if products aren’t sold). Add in any additional income or expenses related to the business on the next couple of lines, if applicable.
- On the next line, calculate net profit before taking income taxes into account, then deduct the taxes paid (or estimated) on the line after that.
- List final net profit or loss on the final line of the profit and loss statement
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