Also known as the income statement, the profit and loss statement is the most important piece of financial documentation a business can prepare. Your company’s profit and loss statement indicates its expenses and revenue resulting in a profit or loss for a specific measuring period. Businesses may prepare a profit and loss statement annually, quarterly, or monthly.
Why Preparing a Profit and Loss Statement Benefits Your Company
Businesses prepare this financial report for both internal and external purposes. From an internal perspective, the profit and loss statement demonstrates the company’s ability to generate sales and control its expenses. This statement differs from a business cash flow statement because it includes accounting principles such as accrual, matching, and revenue recognition that the cash flow statement does not have.
Your business will need a recent profit and loss statement if it intends to borrow money or sell stocks. Lenders and investors will want to see the company’s revenue and expenses to help decide about borrowing money or investing in the business.
How to Structure a Profit and Loss Statement
The person preparing the statement of revenue and expenses for your company should plan to include the categories listed below.
- Cost of Goods Sold, a figure that represents how much it cost your company to purchase supplies and pay for labor to develop products and services.
- Interest paid on outstanding debt
- Marketing and advertising expenses
- Net income
- Research, development, and technology expenses
- Revenue from all sources
- Selling, general, and administrative expenses
Much of the information required to prepare a profit and loss statement is available on the cash flow statement. Accounting personnel will also need access to every checking account and credit card transaction the company made during the reporting period. If receipts are available for petty cash transactions, include those as well.
When preparing the income portion of the profit and loss statement, accounting personnel will need documents supporting revenue the company received from all sources such as checks, cash, and credit card receipts. If the company applied discounts for any sales, that information should also be available.
Most businesses no longer prepare profit and loss statements manually since business accounting software includes this function. Although the software provides category suggestions and keeps a running tab on expenses and revenue, company owners and leadership should understand the information required to prepare an accurate profit and loss report.
The Final Report Number Can Differ from the Actual Amount of Profit or Loss
The accounting principles mentioned above sometimes cause the expected and actual figures representing profit or loss to vary. The accrual principle can affect the outcome when accounting staff records income and expenses when they occurred, not when the company receives or spends the money. With the matching principle, accounting staff matches expenses to revenue during the period the business earned it. Lastly, the revenue recognition principle means the company recognizes revenue owed to it before clients pay their invoices.
Preparing a profit and loss statement is just one function we can help you with at Counting House. Please request a free consult today to learn more.