Calculating an accounting profit or loss has to be done by all businesses of any size, from the small solopreneur blogger to the large enterprises and corporations. Why?
It shows if the business is making money or losing money..
..this is kind of important!
A profit and loss report is also known as an income statement - they mean the same thing and show the same information but the wording is different depending where in the world you are.
The profit and loss report | income statement is the most important and basic of reports that any business should produce, and is not very difficult to do.
A business cannot show a profit at the same time as a loss. It can only be one or the other.
To calculate the accounting profit or loss you will:
See these examples:
See how the loss is shown with a negative sign. Another method is showing the numbers in red -$25, or in brackets like this ($25).
There are two kinds of accounting profit. They are:
Gross if the result of deducting the cost of goods sold from the income.
Net is the total after deducting expenses from the gross profit.
Here is a quick example that includes cost of goods sold:
Having a loss to avoid paying taxes might sound appealing but it's not so good for the financial well-being of the business.
The income on the profit and loss report includes money derived from:
The profit and loss statement shows only deductible expenses.
Deductible expenses (overheads) are those expenses that your tax department has approved the use of to reduce the net profit.
The amount of tax your business pays is calculated on the net profit.
The higher the profit, the higher the tax.
Non Deductible expenses are not included on your profit and loss.
They are instead shown on the balance sheet and include things like:
Here is an example profit and loss report showing the Gross and Net losses
If the report shows a gross loss as in the example above, this means there is not enough money to cover the overheads of the business and that the following could have occurred:-
A review of the systems in place will be necessary to correct these problems and save the business from financial ruin.
A profit and loss report | income statement should be prepared regularly during the financial year for the business owner to analyze.
A minimum of once a month is recommended.
If you struggle with this, then outsource your reporting to a bookkeeping expert who can prepare the report and also give you an explanation of what is happening with your business financials.
Note also, these monthly reports won't show expenses such as depreciation of fixed assets (unless you use accounting software such as Xero that allows you to process the deduction every month) but it can be left to be calculated by an accountant at the end of a financial year.
Depreciation is inserted underneath the Net Profit and deducted to show the Taxable Profit.
Here are some alternatives to the various terms used:-
Profit and Loss Report = Income Statement
Income = Revenue
Cost of Goods Sold = Cost of Sales or Direct Costs
Loss = Deficit
Expenses = Overheads
Profit = Surplus
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