A profit-and-loss statement is the simplest financial statement; it's what the layman may think of as "accounts." It simply details the revenue earned and expenses made during a particular time period. The profit-and-loss statement is also known as an income statement.
Total the revenue and list this on the statement as net sales.
Total the costs specifically related to producing goods and services such as raw materials, packaging and shipping. Deduct the anticipated revenue of any unsold stock from this total. List the result as cost of goods sold.
Deduct cost of goods sold from net sales. List the results as gross margin.
Total all other expenses such as labor, office rent and utilities. List this as total selling, administrative and general expenses.
Deduct total selling, administrative and general expenses from the gross margin. List the result as net profit before tax.
Calculate the appropriate taxes payable on this profit. List this as provision for tax, then deduct it from net profit before tax to produce a figure for net profit after tax.
Listing transactions as they take place, such as when a company delivers goods to a customer, is known as the accrual method. An alternative system, the cash method, lists revenue only when the money is received, which may be in a different accounting period. Subject to prevailing tax and accountancy regulations either system is suitable, but a company should use one system consistently.
A profit-and-loss account does not track cash flow, meaning it will not identify potential liquidity problems in a business.
Potential investors, creditors or tax authorities may require more detailed financial statements, including a balance sheet listing assets and liabilities.