Mary Girsch-Bock studied accounting and business at UIC. After working as an accountant for many years in various industries, including healthcare and property management, she returned to her first love, writing. She specialized in accounting and business articles, with an emphasis on software reviews, which she wrote for more than 20 years. She continues to write for the first publication she ever wrote for, CPA Practice Advisor, while blogging for several software companies.
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A profit and loss statement provides businesses with a view of revenue, expenses, and income over a specified time frame. This step-by-step guide explains how to create a profit and loss statement.
Designed to provide business owners with revenue and expense details, the profit and loss statement, or P&L statement, is a must for business owners, whether you’re a small business bookkeeper, or the head of a global conglomerate.
Like a cash flow statement, a profit and loss statement provides you with detailed information regarding both revenues and expenses for your business.
Also known in accounting terms as an income statement, even a basic profit and loss statement can provide you with a convenient window through which you can view your company’s revenue and expenses.
In addition, profit and loss statements can also be a useful tool for creating a budget or calculating your working capital.
Here are some of our current favorite options for accounting software. These picks offer a combination of value and features we would want to see in a comprehensive accounting software option.
It’s up to you how frequently you wish to run a profit and loss statement. Some companies choose to run one monthly, while others prefer quarterly profit and loss statements.
Example profit and loss report comparing a company's P&L in four regions. Image source: Author
Whatever your preference, the best way to create a profit and loss statement is by using accounting software, which will take care of the entire process for you. If you currently do not use accounting software, you can use a template to create a profit and loss statement.
Here are the steps to take in order to create a profit and loss statement for your business.
The first step in creating a profit and loss statement is to calculate all the revenue your business has received. You can obtain current account balances from your general ledger such as cash and current accounts receivable balances.
If you’re creating a monthly profit and loss statement, you’ll include all of the revenue received in that time frame, whether your business has collected that revenue or not. If you’ve chosen to run a quarterly statement, just add up the revenue received in that three-month time frame.
When calculating revenue, be sure to include all revenue received, whether it’s from selling products and services or from selling your old printer to the business next door.
Your cost of goods sold is an important part of any profit and loss statement. If you’re selling wallets, you’ll have to include the cost of purchasing the wallets from the manufacturer.
If you’re making the wallets, you’ll have to include the materials and supplies needed to make them. If you’re selling services, you need to include the cost of your time or your employee’s time that provided the service.
Once you have calculated your revenue and your cost of goods sold, you’ll just need to subtract the cost of goods sold to arrive at your gross profit number. Gross profit is the profit your business has earned from selling your products and/or services.
Revenue - Cost of Goods Sold = Gross Profit/Loss
The next thing you need to do is calculate all of your operating expenses. Operating expenses include rent, travel, payroll, equipment, utilities, and postage.
Once your operating expenses have been calculated, you’ll want to subtract that total to obtain your total operating profit. This will give you your total operating profit or loss.
Gross Profit - Operating Expenses = Operating Profit/Loss
If you have any additional income not included in your revenue totals above, such as interest income or dividends from investments, you’ll want to include them here. Once added to your operating profit, the total is earnings before interest, taxes, depreciation, and amortization, otherwise known as EBITDA.
EBITDA = Operating Profit + (Interest Income + Dividends Earned)
The next step is to calculate any interest payments, taxes due, as well as depreciation and amortization expenses.
Your final step is subtracting interest, taxes, depreciation, and amortization expenses to arrive at your net income, or net profit.
Net Profit/Loss = EBIDTA - (Interest + Taxes + Depreciation)
A profit and loss statement lets you know exactly how your business is doing. Often used to determine both strengths and weaknesses in businesses, a profit and loss statement can also tell you the following:
We’re all in business to make a profit, so it’s no surprise that one of the most important markers for your business is your gross profit. Your gross profit is calculated by subtracting the cost of goods sold from revenue earned.
This number can tell you how well your products are performing or whether your services are profitable. If your gross profit is low, look to increasing sales.
When reviewing your profit and loss statement, it’s important to look at trends. Whether you calculate profit and loss on a monthly or quarterly basis, comparing reports can help you understand exactly how your business is trending.
For instance, if your net profit for January was $11,000, but dropped down below $5,000 in February, March, and April, you’ll need to do a deep dive into your business finances to determine what happened. You can do that by first examining gross profit. If gross profit is down, your course of action should be to increase sales.
However, if gross profit has remained consistent but net profit is down, that signifies an increase in operating expenses, so you’ll want to start looking at ways to cut expenses. While one profit and loss report is helpful, comparing them can be even more helpful.
The bottom line. When you hand over financial documents to investors or financial institutions, their eyes go to the bottom line: net profit. While having a loss isn’t the end of the world, it does signify that something is amiss, either as a one-time issue or across business operations.
Either way, the profit and loss statement lets you see exactly where your business stands in terms of profit, which in turn allows you to make better business decisions.
It’s not difficult to find a profit and loss statement template that can be used to create a simple profit and loss statement, but the entire process is much easier if you use accounting software.
By tracking the information needed to create a profit and loss statement such as revenues and expenses using accounting software, you can have a current profit and loss statement in seconds.
QuickBooks Desktop is one of the best accounting software options for small and growing businesses. Offering three plans, you can easily scale up to the next plan as your business grows. The latest version of QuickBooks Desktop offers enhanced system navigation and expanded help options.
QuickBooks Desktop offers a good selection of profit and loss statements for your business. Image source: Author
QuickBooks Desktop offers top-notch reporting capability, including several variations of the profit and loss statement. Reports can be easily customized and exported to Microsoft Excel for further customization if needed.
QuickBooks Desktop offers three plans:
FreshBooks is a small business accounting application that offers a long list of features geared toward sole proprietors and very small businesses. Offering online access as well as a mobile app for both iOS and Android devices, Freshbooks lets you collaborate with your employees, contractors, and accountants.
FreshBooks offers profit and loss statements by month or by quarter. Image source: Author
Even sole proprietors need to know how profitable their business is, and FreshBooks does a good job of providing business owners with the reports they need to make good management decisions.
FreshBooks offers four plans, all include product support and solid reporting capability:
OneUp is an affordable, easy to use accounting software application well suited for sole proprietors, freelancers, and small business owners. Offered on the cloud, OneUp works on desktop systems, laptops, and all mobile devices.
OneUp includes a profit and loss statement on their financial dashboard. Image source: Author
A OneUp feature that sets it apart from the competition is the option to enter transactions manually or connect to a bank for automatic transaction posting. Great for smaller businesses, OneUp includes a financial dashboard that provides you with a good view of business profit and cash flow.
OneUp’s pricing structure is also unique, with all features included in all plans, plan pricing based on the number of system users, with five options available:
For a more complete list of accounting software applications, be sure to check out The Ascent’s accounting software reviews.
Creating a profit and loss statement for your small business is vital since it’s one of the best reports to determine whether your business is profitable.
Required by lending institutions and investors alike, a profit and loss statement can also help you pinpoint areas of success as well as spots where your business may need additional help.