The profit and loss statement (PL) of a business reflects the business’s sales and expenses over a specified period of time. All sources of revenue and all business expenses are considered to determine what the net profit of the business is during a measured period of time. The profit and loss statement is considered to be a strong statement of a business’s strength and progress over time. And, this statement is required by the IRS as a record for assessing the taxes that are owed by the business.
When preparing a profit and loss statement, the first factor to make sure that is correct is the time frame being measured. Unlike forecasting tools, the PL statement is a reflection of what has actually occurred within a business over a specific period of measured time.
A profit and loss statement will include the following information about the business:
•Net sales– Total sales during the measured time frame less any trade discounts or returned items
•Cost of goods sold- The true price of goods sold; inventory is often used when determining what this figure is- starting inventory minus current inventory= inventory sold; it can also include the cost of labour, material and supply cost and overhead to manufacture products
•Selling and other administrative expenses- Include any business expenses in this category, including direct and indirect costs to sell, administrative expenses to run the business, supplies, etc.
•Other revenue or income- Any unusual income received such as interest, dividends, rents or royalties
•Other expenses- Unexpected business expenses such as removal or liquidation of equipment or other business losses
When listing all of this information, it is crucial that it is accurate. Your profit and loss statement will only be as accurate as the information that you list. So, accurate record keeping throughout the year is a vital task that should be executed with precision.
When evaluating your PL statement, you will be most interested in the net profit calculation, determined by subtracting all the expenses from the overall income figures before taxes. Net profit demonstrates whether a business is generating profits. In addition to current profit or loss trends, information on a PL statement can be beneficial when comparing to prior years or prior periods.
Business owners can use the information found on a PL statement to make decisions about the direction of their company. If their net profit is negative, it means that they need to make drastic decisions about expenses as well as find creative solutions to increase revenues. Overall, a profit and loss statement is a measure of financial strength and business progress.
Free Printable Profit and Loss Statement Form in PDF – Download