How do I calculate my business profit and loss statement?

A Profit and Loss Statement (P&L), also known as an Income Statement, is a financial document that summarizes the revenues, costs, and expenses incurred during a specific period, such as a month, quarter, or year. It provides a snapshot of your business’s financial performance by showing whether it has made a profit (net income) or incurred a loss (net loss). It’s a helpful way to prepare for tax season – at Waldman Accounting, we recommend it for all of our clients and can help you pull one together.

For your Business Profit and Loss (P&L) statement below are instructions that should help you get on track.

1. P&L Statement Components

The P&L has three main components:

  1. Revenue (Income): All the money earned by the business from sales or services during a specific period of time.
  2. Expenses (Costs):  All the costs the business pays to operate.
  3. Net Profit or Loss: The result after subtracting expenses from revenue.
    • If positive → Profit
    • If negative → Loss

2. Structure of a Profit and Loss Statement

Here is the basic format to follow for creating your profit & loss statement.

CategoryDescriptionAmount
RevenueSales, services, other income$XX,XXX
Less: Cost of Goods SoldMaterials, inventory costs-$X,XXX
Gross ProfitRevenue – Cost of Goods Sold$XX,XXX
Operating ExpensesRent, utilities, salaries, etc.-$X,XXX
Operating ProfitGross Profit – Operating Expenses$XX,XXX
Other ExpensesInterest, taxes, etc.-$X,XXX
Net Profit/LossOperating Profit – Other Expenses$XX,XXX (Profit) or ($X,XXX) (Loss)

3. Step-by-Step Instructions to Create a P&L

Step 1: Calculate Total Revenue

  • Add up all income sources:
    • Sales from products/services
    • Other income (e.g., rental income, commissions)

Example:

2024
Revenue
Sales Revenue$10,000
Rental income$2,000
Total revenue$12,000

Step 2: Subtract Cost of Goods Sold (COGS)

If the business sells products, include direct costs like:

  • Raw materials
  • Manufacturing costs
  • Labor directly related to production

For service businesses, COGS might include tools or supplies.

Example:

2024
Revenue
Sales Revenue$10,000
Rental income$2,000
Total revenue$12,000
COGS
Cost of materials– $4,000
Gross profit$8,000

Step 3: Subtract Operating Expenses

These are the day-to-day costs of running the business. Include:

  • Rent
  • Utilities
  • Salaries or wages
  • Office supplies
  • Marketing/advertising
  • Insurance

Do not include rent/mortgage payment from a personal home or apartment or any utilities from home or apartment. That is included in a home office deduction, which is a separate form.

Example:

2024
Revenue
Sales Revenue $10,000
Rental income $2,000
Total revenue $12,000
COGS
Cost of materials – $4,000
Gross profit $8,000
Operating expenses
Rent $1,200
Utilities $300
Salaries $2,000
Total operating expenses -$3,500
Operating profit $4,500

Operating Profit = $8,000 (gross profit) – $3,500 (operating expenses) = $4,500

Step 4: Subtract Other Expenses

Include any additional costs such as:

  • Interest on loans
  • Taxes
  • Miscellaneous expenses

Do not include personal home mortgage taxes in this calculation. That is included in a home office deduction.

Example:

2024
Revenue
Sales Revenue$10,000
Rental income$2,000
Total revenue$12,000
COGS
Cost of materials– $4,000
Gross Profit$8,000
Operating expenses
Rent$1,200
Utilities$300
Salaries$2,000
Total operating expenses-$3,500
Operating profit$4,500
Other expenses
Interest on loan-$500
Net profit$4,000

Net Profit = $4,500 – $500 = $4,000

4. Final Tips  for your P&L Sheet

  1. Stay Organized: Keep receipts, invoices, and bank statements. We don’t ask for these during tax season or bookkeeping meetings. However, we recommend you store for your records.
  2. Separate Business and Personal Finances:  This will help you track expenses easily. We recommend a separate credit card and bank account for each business.
  3. Use Tools: Consider accounting software like QuickBooks, FreshBooks, or Excel templates. If you need a template or help setting up these programs, the experts at Waldman Accounting are happy to help.
  4. Update Monthly or Quarterly:  Regular updates provide a clear picture of the business’s performance. Our most organized clients are either working with Waldman Accounting for bookkeeping or updating revenue and expense records monthly.

Example of a Simple P&L Statement

Example:

2024
Revenue$12,000
Cost of Goods Sold (COGS)– $4,000
Gross Profit$8,000
Operating Expenses-$3,500
Operating profit$4,500
Other expenses-$500
Net profit$4,000

Purpose of a P&L Statement:

  1. Evaluate Financial Health: Helps assess whether the business is profitable.
  2. Track Performance: Provides insights into revenue and expense trends over time.
  3. Support Decision-Making: Guides budget planning and operational adjustments.
  4. Attract Investors: Demonstrates financial viability to potential investors or lenders – should you ever want to sell your business or raise capital.
  5. Tax Reporting: Often required for tax filing purposes.

This breakdown should help you understand what goes into a P&L statement and how to prepare one. Please contact Waldman Accounting if you need an Excel template or further guidance.

Have questions? Talk to our experts.

Phone

954-347-9647

Email

ianwaldman@waldmanaccounting.com

Address

Ft. Lauderdale, Florida