A Beginner’s Guide to a Profit and Loss Report

profit-and-loss-report

The profit and loss (P&L) report is a financial statement known as an income statement or statement of operations. The profit and loss report represents the total income and total expenses of a business.

The profit and loss report’s objective is to determine a business’s financial health by excluding the expenses. 

What this article covers:

What is a Profit and Loss Report?

The profit and loss report is a summary of revenues and expenses generated by a business. Every company has its standard operating procedure where these statements can be generated weekly, monthly, quarterly, or annually.

The basic formula of a P&L report:

Revenue – Expenses = Profits

What Does the Profit and Loss Statement Show?

The profit and loss statement is an essential financial statement for business owners or accountants to account for a specified period. It helps in overviewing the finances over time. The report consists of information that tells about the net profit based on revenues and expenses. It reveals how a business can cut its costs and generate profits by driving revenues. 

The P&L statement helps a business to create a financial budget and allocate resources accordingly. It investigates revenue and expense trends, net income, cash flows, and overall profitability.

Also, the profit and loss report is required by the IRS to assess taxes on the business profits.

Components of a Profit and Loss Report:

  1. Revenue: it represents net sales or turnover during the accounting period. The revenue generated by primary business activity and the non-operating revenue and gains on the sale of long-term business assets is included. 
  2. Cost of goods sold: the cost of goods and services.
  3. Gross Profit:  Also known as gross income or gross margin, the gross profit is net revenue excluding costs of sales. 
  4. Operating Expenses: Operating expenses are administrative, general, and selling expenses that are related to running the business for a specific period of time. This includes rental expenses, payroll, utilities, and any other expense required to operate the business. Also included are non-cash expenses such as depreciation.
  5. Operating Income: It refers to earnings before taxes, depreciation, interest, and authorization. Deduct operating expenses from your gross profit to calculate operating income.
  6. Net Profit: It is the total amount earned after deducting the expenses. To calculate net profit, subtract the total expenses from your gross profit.

Additional Components:

In addition to the basic P&L components detailed above, there are other factors that may be relevant, including interest expense and income, income taxes, and earnings per share.

  • Interest Expense and Income

Your company’s interest expenses and income, if applicable, are part of your P&L. The former is the amount of interest you pay on loans, while the latter is the money coming in from certificates of deposit, money market accounts, and similar interest-bearing sources. Your P&L can show these interest expenses and income separately or combine them. Add or subtract the overall interest amounts from your operating profits.

  • Income and Other Taxes

Income taxes are reported as an expense and appear on the line prior to the net income calculation. You would include federal, state, and local taxes, but not property taxes. The latter is deductible and appears as an operating expense as part of overhead. To lessen confusion, property taxes may be listed on the P&L as “taxes other than income taxes.” That category may also include applicable franchise taxes and any taxes specific to an industry.

  • Earnings Per Share

If your business has shareholders, there’s an additional calculation — earnings per share (EPS). As the U.S. Securities and Exchange Commission explains, “This calculation tells you how much money shareholders would receive for each share of stock they own if the company distributed all of its net income for the period.” If you generally reinvest earnings in your business, you’re not alone. While companies virtually never distribute all of their earnings to shareholders, it is important information to have. Calculate EPS by taking the total net income and dividing it by the company’s number of shares outstanding.

How to Calculate Profit:

To find the net profit (or net loss) of your business, here are a few simple steps.

  • Gross Profit = Net Sales – Cost of Sales
  • Net Operating Profit = Gross Profit – Operating Expense
  • Net Profit before Taxes = Net Operating Profit + Other Income − Other Expense
  • Net Profit (or Loss) = Net Profit before Taxes − Income Taxes

Profit and Loss Report sample:

A P&L starts with a header that contains the name of your business and the accounting period.

This is followed by:

  • Income
  • Expenses
  • Net Profit

Here is a sample Profit and Loss Account.

How do I write a Profit and Loss Statement?

There are two methods of creating a profit and loss statement manually.

Single-Step Method:

The single-step method is usually used by service-based industries and small businesses. The single-step method helps in finding the net income by subtracting expenses and losses from revenues and gains. The method uses a single subtotal for all revenue line items and a single subtotal for all expense items. The net gain or loss appears at the bottom of the report.

Net income = (Revenue + Gains) – (Expenses + Losses)

This income statement, however, does not provide expense breakdown by department or gross margin calculations.

Multiple-Step Method:

An alternative to the single-step method, the multi-step profit and loss statement separates the operating revenue and operating expenses from other revenue and expenses; this is done to calculate the gross profit. This method is better suited for inventory-based businesses.

The three-step process of the multi-step method are:

  1. The gross profit is calculated by subtracting the cost of goods sold from net sales.
  2. Operating income is calculated by subtracting operating expenses from gross profit.
  3. The net amount of non-operating revenues and gains is combined with non-operating costs and losses to calculate net income.

Instead of manually creating a P&L report, you can use online accounting software to streamline the process. The detailed breakdown of profits and losses in the financial statements will give you the full picture when it comes to the health of your business.

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