A profit and loss statement is a financial document used by businesses to evaluate the financial status of their company within a given time period. Within this specified period of time, usually a quarter, a profit and loss statement lists all of the accounts receivable and accounts payable of a business. The profit of a business is defined as money that is available once the company subtracts all of its expenses from the incoming funds. A loss is something that a company does not get paid for. Two common losses include delinquent accounts and depreciation of assets.
A profit and loss statement can be used for many purposes. A profit and loss statement may be used by a company owner or corporate officers. It may even be generated and discussed during shareholder meetings. It can show a company where it has grown and where there needs to be an improvement. For business owners who need financial backing, a profit and loss statement may be requested by potential investors or loan officers because it gives them insight on the financial performance of your business and enables them to determine whether or not you will be able to pay back the loan or the investment.
While each profit and loss statement will be unique to each company, there is a line of commonality that you will generally see among most P&L statements. A profit and loss statement generally includes:
Because a profit and loss statement is a financial document, there are simple math formulas that you can use to determine your gross margin, net operating profit, net profit before taxes, and your actual net profit.
Using the accrual method of accounting keeps cash flow from the cash flow statement completely separate from activity in the income statement because the income statement posts revenue and expenses without regard to cash that moves in or out of the business.
The net income of the income statement is transferred over to the equity section of the balance sheet.
The balance sheet formula is: Assets = Liabilities + Equity
Income statement amounts begin each period with a zero balance, while balance sheet amounts are carried over from one period to the next. At the end of each accounting period, whether it is each month, quarter, or year, the preparer will close their books by resetting all of the company’s expense and revenue accounts to zero. The total revenue (less expenses) is posted to net income, which, in turn, increases the equity section of the balance sheet.
The income statement formula (see above) is used to produce a simple, one-step income statement, however, many companies prefer to analyze their business’ financial status with a more complex, multiple-step income statement because it provides greater detail over the one-step form. Multiple step income statements separate operating costs and income from other activity unrelated to such expenses, such as depreciation, or interest charges in relation to borrowing.
Analyzing operating and non-operating income is important because it helps companies view the income they are generating, which in-turn, helps them thrive in the long run. Non-operating income can include investments, property, asset sales, as well as other gains, however, these forms of income are atypical and cannot be relied on for financial success.
A profit and loss statement can be prepared by the owner of the company or the accountant. Some accounting programs can also help you put together a profit and loss statement. FormSwift’s profit and loss statement template is created for business owners who need to easily create the document and do not have access to a program generated option.
You can do that if you want. If your business is new, creating a monthly profit and loss statement can help you determine where you need to cut expenses. However, most companies create a profit & loss statement on a quarterly basis.
Below is a step-by-step guide to help you identify each section of a profit and loss statement, as well as its description.
There you have it! By now you should have a clear understanding of what a profit and loss statement is and how it can help you better understand the financial health of your business. A profit & loss statement is an important financial statement that your company will use to not only secure possible loans or investments but will also provide insight on areas where your company can grow and where it can potentially cut back. Using the step-by-step guide above, you can create your own income statement with ease regardless if you run a small business or operate a major corporation.
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