Profit and loss statements are an important business document because it categorically shows if a business is on a downturn — allowing you to take immediate steps before the losses become painfully huge. It can also help you assess a business opportunity and monitor expenses and possible percentage of revenue.
Here is a basic guide on how to create an effective profit and loss statement. It is simple, practical and straightforward, like all of o5.com’s recipes for life.
What is a Profit and Loss Statement?
Also called an income statement or a P&L statement, a Profit and Loss statement will show if your business is earning money or operating at a loss.
In this statement the profits for a particular period of time is indicated. Then the operating and non-operating expenses are subtracted from it to indicate the net profit of the business. A positive amount means the business has earned a profit. A negative amount means that a loss was generated instead. You can see how crucial it is to have an effective and accurate profit and loss statement.
Effective Profit and Loss Statement: Step 1
Gather all of the documents that relate to your company’s expenditures and revenues and then group them by the period of time you will use for your P&L statement – for example, mothly, quarterly, or semi annually. Also prepare a calculator, a sheet of paper and a pen to help you in computing the figures.
Effective Profit and Loss Statement: Step 2
Sort your receipts based on what type of expense they are. Sort by utilities (electricity, phone, internet and water bills), payroll, rent, office supplies expenses, insurance payments, among others.
Effective Profit and Loss Statement: Step 3
Prepare a piece of paper and divide it into three columns, this should be marked your ‘income statement’ paper. Also indicate the time period on the top.
Effective Profit and Loss Statement: Step 4
Write ‘Revenues’ on the first column, and in this section input all of the income derived for the time period indicated on top of the paper. Detail it in such a way that you get to see where the income came from and for what amount. The subtotal of all the income is indicated in the second column. The third column will indicate the total revenues for the business. This is the Gross profit. If you only have one source of income then there’s no need to indicate an amount in the second column, just proceed to the third column and indicate the profit there. There’s no need to use the second column anymore.
Effective Profit and Loss Statement: Step 5
Now write Expenses on the first column just below the gross profit entry. In this area list down all of your expenses during the same period of time used in listing the revenues. The amounts will be placed on the second column. Add up all of the expenses and write the total figure under the gross profit, which is indicated in the third column.
Effective Profit and Loss Statement: Step 6
Subtract the total expenses you have incurred from your gross profit. The resulting figure is the Net Income. The result will determine if you have made an income or suffered a loss in your business.
Remember to always make a profit and loss statement or balance sheet for your business, and always make sure that the entries are all accurate to ensure that the correct financial situation is reflected in these documents. These documents are very important especially if you want to entice new investors to your business or to approve a loan application from creditors.
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