The profit-and-loss statement is also known as the income statement. It tells you how much net income your business earned in a given period. The basic format is the same for all businesses, though there are minor differences depending on your business structure.
To figure net income, you need to know your total income and total expenses for the period. If you've been recording your transactions throughout the period, you can simply open your accounting software to get the data. Otherwise, you'll need to gather these records, including receipts, bills and invoices.
The type of documentation required depends on whether you operate on a cash or an accrual basis. If you run a cash-basis business, you only include income or expense items when you receive or spend the money. Accrual accounting records income when you've done the work, even if the customer has 30 days to pay. Likewise, if your business buys now and pays later, it records accrual expenses when you make the purchase, not when you pay the bill.
If you use accrual accounting, income is not the same as cash flow. Even if your profit-and-loss statement shows you're doing well, it's possible to have so little cash flowing in that you can't make ends meet.
Information You'll Need
- Business expenses incurred during the period covered by the statement, including utility bills, travel expenses, supplies purchased and contractors hired.
- Your beginning and ending inventory for the period, if you deal in goods.
- Your gross revenue for the period.
Drafting the Statement
If all you want is to know your business's net income, it's simple. Take the total income for the period, subtract all the expenses and record the result. That gives you the net income right there.
For a more detailed analysis, you can break income and expenses down into separate items. Start with total revenue, then subtract the cost of goods sold. This includes items such as raw materials and manufacturing costs. Next subtract other expenses, distinguishing regular costs such as travel or advertising from irregular expenses such as buying a new computer. If you have irregular income — such as if you sold your old computer after buying the new one — add that in, but separate from regular revenue. This gives you your total pre-tax income. You can find sample statements online to get an idea of how yours might look. Software packages can help with the more complex income statements.
- Accounting Coach: What Is the Profit-and-Loss Statement?
- Inc.: Income Statements
- Edward Lowe Foundation: “How to Prepare a Profit and Loss (Income) Statement”
- Wake Forest University: INcome Statement Items
- Cliff's Notes: Income Statement
- Accounting Coach: How Do the Income Statements of a Sole Proprietorship and a Regular Corporation Differ?
- Sacrament City College: Basic Financial Statement — Sole Proprietorship
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.