How to Fill Out a Profit and Loss Statement

A profit and loss (P&L) statement, also known as an income statement, summarizes a company’s revenues, costs, and expenses during a specific period. Its function is to show a company’s financial performance and profitability over time. The P&L statement helps business owners and stakeholders make informed decisions by providing a clear look at the financial health of the business.

This financial report is a standard requirement for securing loans, attracting investors, and completing annual tax filings. The structure of the statement is straightforward, moving from total income down to a final net profit or loss figure. It provides a dynamic view of financial activity over a set timeframe, unlike a balance sheet, which offers a static snapshot at a single point in time.

Key Decisions Before You Start

Before you begin, you must select the time frame the statement will cover. P&L statements are prepared on a monthly, quarterly, or annual basis. The choice of period depends on your business needs; monthly statements are useful for ongoing operational adjustments, while annual statements provide a broader overview for tax purposes. Consistency in your reporting periods is important for making meaningful comparisons over time.

The next decision involves choosing an accounting method, which dictates when you record revenue and expenses. The two primary methods are cash basis and accrual basis. Under the cash basis, transactions are recorded only when money actually changes hands. Revenue is logged when you receive a payment, and an expense is logged when you pay a bill.

The accrual basis records revenues when they are earned and expenses when they are incurred, regardless of when the cash is exchanged. For example, if you complete a service for a client in December but don’t receive payment until January, the accrual method requires you to record that revenue in December. This method provides a more accurate picture of a company’s profitability.

Information to Compile for the Statement

To build an accurate P&L statement, you must gather specific financial documents. These records are the source of all the figures you will need and include items like:

• Sales logs
• Bank and credit card statements
• Invoices sent to customers
• Receipts for purchases
• Payroll records

The first component to calculate is your total revenue, sometimes referred to as sales. This figure represents all income your business generated from its primary activities during the chosen period. For a retail business, this would be the total sales of products, while for a service-based business, it would be the total fees earned for services rendered.

Next, you will identify the Cost of Goods Sold (COGS). COGS includes the direct costs associated with producing the goods or services you sell. For a company that sells products, this would include the cost of raw materials and direct labor costs. For a service business, COGS might be minimal but could include costs like software subscriptions necessary to deliver the service.

Operating Expenses (OpEx) are the costs required to run the business that are not directly tied to production. These are the day-to-day expenses that keep your operations going, such as rent, utilities, marketing costs, administrative salaries, and insurance premiums.

Finally, you need to account for non-operating income and expenses. These are financial activities not related to the main business operations. Non-operating income could include interest earned on a business savings account, while expenses include interest paid on business loans or losses from asset sales.

Assembling the Profit and Loss Statement

Once you have gathered your financial data, assemble the P&L statement in a specific order to correctly calculate your net income. The structure follows a multi-step format that provides several important subtotals along the way.

You begin by listing your total revenue at the top of the statement. Immediately below revenue, you subtract the total Cost of Goods Sold (COGS). The resulting figure is your Gross Profit, which represents the profit your business made from selling its products or services before accounting for other operating expenses.

After calculating gross profit, you will list and sum up all of your operating expenses. Subtracting the total operating expenses from the gross profit gives you the Operating Income. This figure is an indicator of your core business’s ability to generate profit from its regular activities.

The final steps involve accounting for non-operating items and taxes. Add any non-operating income and subtract any non-operating expenses from your operating income to arrive at Earnings Before Tax (EBT). The last calculation is to subtract the income tax expense for the period, which results in your Net Income.

Interpreting Your Statement’s Key Figures

Understanding the key figures on your P&L statement allows you to assess your business’s financial health and operational efficiency. The main indicators to focus on are gross profit, operating income, and net income.

Gross profit reveals how efficiently your business is producing and selling its products or services. A healthy gross profit margin indicates that you are pricing your offerings effectively and managing your direct production costs well. Analyzing this figure over time can help you spot trends in material or labor costs and adjust your pricing strategy accordingly.

Operating income demonstrates the profitability of your core business operations, separate from any financing or investing activities. A strong operating income shows that the business model is sound and capable of generating profits on its own. If this number is low, it may suggest that day-to-day expenses are too high relative to the gross profit being generated.

Net income, often called the “bottom line,” represents the total profit or loss after all expenses, including taxes and interest, have been deducted from all revenues. This is the measure of your company’s profitability during the reporting period. This figure should be analyzed in context with the other profit indicators to get a complete picture of your financial performance.