How to Do a Profit and Loss Statement

A Profit and Loss (P&L) statement, often referred to as an Income Statement, provides a financial summary of a company’s performance over a specific period. This report details the revenues generated and the costs and expenses incurred to achieve those revenues. By presenting this information, the P&L statement reveals whether a business made a profit or incurred a loss during a given accounting period, typically a quarter or a year.

Gathering Your Financial Data

Creating an accurate Profit and Loss statement begins with meticulously gathering all relevant financial information. This requires identifying various income streams and expenditures, then collecting the corresponding documentation.

Revenue sources represent all the money a business earns from its operations. This includes income from the sale of goods or services, interest earned on investments, or rental income from properties. Sales invoices, point-of-sale reports, and bank statements are primary documents where this revenue information can be found.

The Cost of Goods Sold (COGS) includes the direct costs associated with producing the goods or services that a company sells. These expenses encompass direct materials, direct labor, and manufacturing overhead directly tied to production. Relevant data can be sourced from supplier invoices for raw materials, payroll records for production wages, and inventory valuation reports.

Operating expenses cover the costs incurred in the day-to-day running of a business that are not directly tied to the production of goods or services. Common examples include salaries and wages for administrative staff, rent for office space, utility bills, marketing and advertising costs, insurance premiums, and office supplies. Depreciation, the expense of an asset’s value over its useful life, also falls into this category. These expenses are documented through vendor invoices, utility statements, payroll records, and bank statements.

Beyond regular operating activities, businesses may also have non-operating income and expenses. Non-operating income could include gains from the sale of an asset, while non-operating expenses might involve interest paid on loans or losses from investments. Bank statements, loan agreements, and investment statements are key documents for identifying and quantifying these financial events.

Structuring Your Profit and Loss Statement

Once financial data has been collected, organizing it into the standard structure of a Profit and Loss statement is the next step. This structure allows for a clear presentation of a business’s financial performance.

The P&L statement begins with Revenue, often referred to as sales, representing the total income generated from a company’s primary business activities during the specified period. Directly following revenue is the Cost of Goods Sold (COGS), which is subtracted from revenue to arrive at the Gross Profit.

Gross Profit indicates the profitability of a company’s core operations before considering overhead expenses. Following gross profit, various Operating Expenses are listed. These include Selling, General, and Administrative (SG&A) expenses, such as marketing, administrative salaries, rent, and utilities.

Subtracting operating expenses from gross profit yields Operating Income, also known as Earnings Before Interest and Taxes (EBIT). This figure shows the profit generated from a company’s primary business activities, excluding financing costs and taxes.

After operating income, non-operating items are introduced. These include income or expenses not directly related to the core business, such as interest income, interest expense, or gains and losses from asset sales. These adjustments lead to the Pre-Tax Income.

Pre-Tax Income represents the company’s profit before any income taxes are applied. Finally, Income Tax Expense is calculated and subtracted from pre-tax income.

The final figure on the P&L statement is Net Income, often called the “bottom line.” This represents the total profit or loss remaining after all revenues, costs, expenses, and taxes have been accounted for.

Calculating Your Profit or Loss

With the financial data gathered and the P&L structure understood, the final step involves performing the necessary calculations to determine a business’s profit or loss.

The first calculation involves determining the Gross Profit. This is achieved by subtracting the Cost of Goods Sold (COGS) from the total Revenue. For example, if a business had $500,000 in revenue and its COGS amounted to $200,000, its gross profit would be $300,000.

Next, all individual Operating Expenses are totaled. If these expenses sum to $150,000, this total is then subtracted from the Gross Profit to arrive at the Operating Income. In this scenario, $300,000 (Gross Profit) minus $150,000 (Operating Expenses) results in an Operating Income of $150,000.

After calculating operating income, any non-operating income is added, and non-operating expenses are subtracted to arrive at Pre-Tax Income. If there was $5,000 in interest income and $10,000 in interest expense, the calculation would be $150,000 (Operating Income) + $5,000 (Interest Income) – $10,000 (Interest Expense), leading to a Pre-Tax Income of $145,000.

The Income Tax Expense is then calculated by applying the relevant tax rate to the Pre-Tax Income. If the pre-tax income is $145,000, the income tax expense would be $30,450 ($145,000 0.21).

Finally, the Net Income is determined by subtracting the Income Tax Expense from the Pre-Tax Income. In the example, $145,000 (Pre-Tax Income) minus $30,450 (Income Tax Expense) results in a Net Income of $114,550.