What is a profit and loss statement?
A profit and loss statement (P&L) is a financial statement that gives details of a company’s total cost (what you pay to offer a service or to produce a product), total income, total expenses (what you pay as overhead cost), and net income over a certain period of time. It is the same as the income statement. The report is an indicator of a company’s ability or inability to generate sales, create profits, and manage expenses. One can derive a profit and loss statement for any time period, but the most popular time frames are; annually, quarterly and monthly.
It is among the three financial statements that each public company must provide either quarterly, annually, or both together with a cash flow statement and balance sheet. These three documents offer the true picture of a company’s financial health
How do I do a profit and loss statement?
When creating a profit and loss statement your focus should be on two accounts i.e. income and expenditure accounts. Some examples of expenditures as provided by the Internal Revenue Service include items such as; the cost of goods sold, insurance, salaries, taxes, rent, and interest on business loans. Examples of income include; interest income, revenue, sales, rental income, and fees for service.
Now, after you have identified your income and expenditures, the next step is to choose how to present this information. There are two options that you can use. The first option is to gather all the necessary information and then input them on a spreadsheet using either google or excel spreadsheets. Or you can opt to use the accounting system software for small businesses.
Here is a step by step process of creating a
profit and loss statement.
Step 1: Choose a time frame
The first thing you will need to ask yourself is; for what time frame will the statement be? Is it annual, quarterly, or monthly? Short time frames such as monthly, usually don’t offer enough information that one can use to make concrete decisions. On the other hand, you do not want a very long duration that will prompt you to comb through years and years of data.
Step 2: Calculate revenue
After you’ve selected the time frame, the next thing you’ll need to do is to compute all the business revenues you’ve received during that time period. To obtain the current account balances, you can check your general ledger e.g. current and cash account receivable balances.
If you’ve decided to develop a monthly profit and loss statement, you will have to include all the revenue collected within that time frame, irrespective of whether you’ve received it or not. If on the other hand, you have opted to do a quarterly statement, you just need to sum-up all the revenue collected within that time frame.
Another important thing to note is that when you are computing revenue, be certain to add all revenue collected, regardless of whether it is from offering services and selling products, or from the sales of old equipment to a friend or a customer.
Step 3: Compute expenditure (cost of items sold)
The cost of items sold is a crucial component of any profit and loss statement. If you are selling shoes, you will need to include the cost of buying the shoes from a wholesaler or manufacturer. If you are making the shoes yourself, you will have to include the cost of the material and other supplies. If you offer services, you will have to add the cost of you or your employee’s time.
Step 4: Compute your gross profit
After you’ve established the cost of goods sold and your revenue, you will then need to calculate the gross profit by subtracting your total expenditure (cost of items goods (COGs)) from your revenue.
Revenue – COGs = Gross profit or loss
Step 5: Compute operating expenses (OPEX)
The next thing after you have determined your gross profit is to calculate your operating cost or OPEX. Operating cost comprises of items such as; equipment, payroll, travel, postages, and rent
Step 6: Determine Operating Profit
To determine the operating profit, you will need to subtract the operating expense from the gross profit i.e.
Gross Profit – OPEX = Operating profit/loss
Step 7: Add any other income to you operating profit
If there are any other business income e.g. dividends from investments or interest income that was not added when calculating revenue, this is the point where you add them. Once added the total becomes, total earnings before depreciation, taxes, interest, and amortization which is also referred to as EBITDA.
Step 8: Compute amortization, depreciation, taxes, and interest
You will also need to calculate any taxes due, interest payments, amortization, and depreciation. The last step will be to calculate the net profit by subtracting taxes, interests, amortization, and depreciation expenses from EBITDA
What is a profit and loss statement example?
Here is an example of a profit and loss statement
Profit and loss statement for De Company for the year ending 30th June 2020
Total revenue $1,000,000.00
Cost of Goods Sold (COGS) -$20,000.00
Gross Profit $80,000.00
Operating expenses
Salaries $10,000.00 $10,000.00
Rent $10,000.00 $10,000.00
Utilities $5000.00 $5000.00
Depreciation $5000.00 $5000.00
Total Operating Expenses -$30,000.00
Operating Profit (EBIT) $50,000.00
Interest Expense $10,000.00
Income Taxes (EBT) $40,000.00
Taxes -$10,000.00
Net Income $30,000.00
How do I do a profit and loss statement in Excel?
The first thing you need to know before creating P&L on Excel is that there are certain essentials that should be
included in your statement regardless of the size of your company. You will need to create three header rows at the top. The first row is where you will enter the business name. The second row will contain the title of the report i.e. profit & loss statement, while the last line will have the period in which the statement represents. An example includes:
- For the quarter ended 30 June, 2020 or
- the month ended June 2020 or
- the year ending June 2020
After you have created the three header rows, skip one raw for clarity purpose. The next step will depend on whether you’re using a multi-step or single-step, nonetheless, some of the elements are shared. Begin at the first column and where information needs to be indented, move to the next column.
Also, you will need to edit the width of the first column so that the information correctly line up in the second column after the distortion created by the first several characters above it. In both formats (multi-step and single-step), you will be required to list the revenues and then the expenses in that order, with a total labeled net income. After the account titles have been entered, skip two columns, and then enter the dollar values. Ensure that you adjust the column settings so as it displays as currency.
Single-step income
statement
Single-step income statement entails the use of a basic formula i.e.
Net income = (revenue + gains) – (expense + losses)
In excel, enter “revenue and gains” on the first row, then indent the next rows and enter the different gains and revenues account for your business. Indent the next line and label it “total revenues and gains”. After this is done, skip a row and type “losses and expense” then indent the next line and list the losses and expenses accounts. Indent once again for the “total losses and expense”. The last line is the expense and income.
Multi-step income statement
The key difference between multi-step and single-step format is that in multi-step you separate non-operation from operation items. The statement begins with the cost of goods, sales, and gross profit. This is followed by operating expenses, subtract the above and you get operating income. You’ll then be required to list the non-operative gains, loss, and expenses, then sum up the non-operating expenses.
Adding non-operative and operating expenses, you get net income
What does a P&L financial statement look like?
The profit and loss statement gives investors, stakeholders, and all the other interested parties a picture of the company’s financial performance. It helps them to know the company revenue, expenditures, and net profit or loss. Expenses and revenue are displayed when they were incurred, and not necessarily when the money was moved. The P&L statement can be displayed in a short single-format or in a detailed multistep format.
