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A Profit and Loss is a statement that provides a financial breakdown of your business and its financial health. In addition, the Profit and Loss Statement assists when applying for business loans and personal loans.
The Profit and Loss Statement is also known as the Income Statement. Income Statements provide revenue from goods and services along with expenses spent for your business.
Use the Profit and Loss to review monthly, quarterly, and yearly profits and losses. Business owners and management use the statement to strategize business growth, recognize seasonal trends, changes in sales, and changes in expenses.
Who Should Have a Profit and Loss Statement?
Entrepreneurs, small business owners, and anyone who owns a company should have a Profit and Loss Statement.
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When Is a Profit and Loss Statements Required?
A Profit and Loss is required when a business owner needs to report revenue and acquire loans for their personal and business needs.
The Profit and Loss Statement is required:
- when the business owner is purchasing a home or other large purchase
- when the business needs a business loan or other funding
- during income tax season
- for investment companies
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Sections of a Profit and Loss Statement
It is important to understand each section of the Profit and Loss so you can financially grow your business.
Although the income statement may look a little different from business to business the concept is still the same.
Below is a list of typical sections you will see on a P&L:
- Total Income is the amount of income you receive before expenses from selling goods or services.
- Costs of Goods Sold are labor, materials, parts, and other costs linked to the production of goods or services.
- Gross Profit is the total amount when you deduct Cost of Goods Sold from Total Income.
- Expenses are qualified tax deductions you can claim on an income tax return. Some of these business costs are wages, rent, and office supplies.
- Other Income and Expenses are additional items not directly linked to the regular operations of the business. An example of this is dividends or interest received from your bank.
- Net profit is Gross Profit +/- all other income and expenses on the P&L.
A positive net profit number indicates there is a profit in the business and a negative net profit number indicates there is a loss in the business.
Yes, the net profit helps to reveal how the company is doing. However, the net profit will not give you a complete overview. Look into quarterly, semi-annual, or yearly statement comparisons to identify growth or issues within the business.
Who Prepares the Profit and Loss Statement?
Business owners hire experienced bookkeepers and accountants for accurate reporting. Well-versed business owners often decide to complete their own bookkeeping and accounting.
However, it is recommended to hire a professional to make sure all of your bookkeeping is prepared correctly. You can count on your business statements and reports when your bookkeeping is correct.
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Programs and Accounting Software
As I’ve said before I believe accounting software for a business is crucial. Free or inexpensive accounting programs will not provide statements and reports.
Excel provides templates for Profit and Loss Statements, but remember you have to provide data for the template.
I use QuickBooks accounting software for bookkeeping. You can also use programs like FreshBooks to maintain regular bookkeeping and produce statements and reports.
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Updating and reviewing a Profit and Loss Statement will help you understand how your business is performing financially. Use the statement for snapshots of monthly, quarterly, and yearly profits and losses.
Recognizing where your business is succeeding and failing is imperative to a business and those who own and manage them. Therefore, keep your bookkeeping up to date so your P&L is updated too!
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