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:
- Revenue (Income): All the money earned by the business from sales or services during a specific period of time.
- Expenses (Costs): All the costs the business pays to operate.
- 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.
Category | Description | Amount |
Revenue | Sales, services, other income | $XX,XXX |
Less: Cost of Goods Sold | Materials, inventory costs | -$X,XXX |
Gross Profit | Revenue – Cost of Goods Sold | $XX,XXX |
Operating Expenses | Rent, utilities, salaries, etc. | -$X,XXX |
Operating Profit | Gross Profit – Operating Expenses | $XX,XXX |
Other Expenses | Interest, taxes, etc. | -$X,XXX |
Net Profit/Loss | Operating 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
- 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.
- Separate Business and Personal Finances: This will help you track expenses easily. We recommend a separate credit card and bank account for each business.
- 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.
- 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:
- Evaluate Financial Health: Helps assess whether the business is profitable.
- Track Performance: Provides insights into revenue and expense trends over time.
- Support Decision-Making: Guides budget planning and operational adjustments.
- Attract Investors: Demonstrates financial viability to potential investors or lenders – should you ever want to sell your business or raise capital.
- 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.