A profit and loss statement is the number one report for any business including sole proprietors and the self-employed, because it shows the results of income minus expenses.
Is it making a profit or a loss? Is it earning more income than spending on expenses?
This statement is a business report taken out of the bookkeeping records for a period of time such as one month or one year.
The profit or loss result is a major factor in calculating how much tax to pay to the government.
This report is only as good and accurate as the data input to the bookkeeping system.
You can either click on the quick image links below for extra information, or scroll down to read about the basics.
Sample Profit and Loss Statement
The statement lists the Income and Expenses, which is why it also goes by the name of:
The following information is found on a profit and loss statement :-
It does not have the following information:-
…..these details are included on another report - the Balance Sheet.
The profit and loss statement can be produced weekly, monthly, six monthly or annually, or even for one day!
However, preparing this report once a month is the most recommended and usual time frame for keeping an eye on how the business is doing.
It can be based on accrual figures or cash figures.
This report is used for a number of purposes some of which are listed below.
If a net profit is earned, this figure will be used towards calculating the Income Tax payable to the government.
This is done at the end of every financial year (every 12 months).
If the year end result is a loss, there will usually be no income tax to pay because losses are tax deductible but they are not so good for the day to day running of the business as it means the cash flow will be tight and it will be difficult to cover expenses.
If the business is applying for a financial loan, the loan provider (like a bank) will want to see the applicant's Profit and Loss Statement to analyze if loaning money to the business is a viable step.
To help the bookkeeper pin-point if the business is recouping its cost of goods sold. i.e. is the business on-charging to customers all the direct costs it incurred to complete a job?
A chart of monthly summary figures taken from the Profit and Loss statement is useful for showing the trends of business trading, such as the rise and fall of income and expenses.
This gives the owner an opportunity to analyze the activities of the business and investigate why, for example, income in one month was much lower than another month which leads to the next point.....
To help business management work out ways of improving business operations such as where to cut down on expenses.
As mentioned above, this report is based on all income and expenses which are earned or spent by a business.
The accuracy of this statement is only as good as the entries that are made into the bookkeeping system by the bookkeeper or owner. This is why it is important to:
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