How To Prepare A Profit & Loss Statement: It’s Easy With Our Free Template - Digital.com (2024)

Very few small business owners have an interest in accounting.

But as everyone finds out, understanding the basics of accounting can be the difference between the success and failure of your company.

There are three particular financial statements that all small business owners should understand: balance sheets, cash flow statements, and profit and loss statements (P&L).

They all seem rather annoying and complex on the surface, but if you break them down one at a time, they’re pretty simple.

This post focuses on P&L statements.

By the end of this post, you’ll know 99% of all you’ll ever need to know about P&L statements. And you can .

How To Prepare A Profit & Loss Statement: It’s Easy With Our Free Template - Digital.com (1)

What is a Profit and Loss Statement (P&L)?

A P&L statement, also referred to as an income statement, measures your business revenue (income or sales) and expenses during a given time period.

Put another way, a profit and loss statement tells you whether or not your business is making money. Small business owners can use a P&L statement to assess business performance, identifying room for improvement and new strategies for growth.

It’s the “best tool for knowing if your business is profitable”, according to the U.S Small Business Administration.

Typically, a P&L statement is assessed over the following common time periods:

  • Monthly
  • Quarterly
  • Annually

Some P&L statements are very simple to create and understand, as they are just a few lines.

Others can span pages.

It depends on the size of your business, and how complex it is.

A small business that only has a few sources of income or expenses will have a short P&L, while a large business with multiple income streams will have a longer one.

Finally, what does a “statement” look like? A P&L statement is essentially just a table, usually created in any spreadsheet tool (Excel, Google Sheets, etc.).

What Is The Purpose of a Profit and Loss Statement?

How To Prepare A Profit & Loss Statement: It’s Easy With Our Free Template - Digital.com (2)

Ultimately, the purpose of a P&L statement is to calculate your net operating profit or loss.

If you make a profit, great! You can re-invest it, save it, or make a variety of other decisions. If you end up with a loss, it’s a clear signal that your business is on an unsustainable trajectory, and you’ll need to find a way to turn things around.

But on top of that, a P&L can be used to help you make informed decisions like:

  • Can you afford to hire any new employees?
  • Can you afford to move to a bigger office?
  • How will you plan your taxes?
  • Is your current growth strategy effective?

The P&L statement can also have additional uses depending on who’s looking at it.

Investors and Lenders

For example, investors will look at your P&L statements from multiple time periods to see how profitable your business is over time. They can also glean information about the efficiency of your operations, your competitiveness, and the soundness of your business model.

Lenders will look at P&L statements to determine whether or not your business is likely to make a profit in the future big enough to pay back loans and interest.

One last important note about P&L statements is that they do not represent your business’ financial health by themselves. They may reflect it in some cases, but they can be skewed (or misleading) by billing practices or fraudulent reporting of transactions (whether intentional or not).

That’s why it’s important to understand all three major financial statements that I mentioned at the beginning.

Understanding a Profit and Loss Statement

If it’s the first time you’re digging into profit and loss statements, parsing through these kinds of financial records can be daunting. There might be terms you’ve never seen before, so it’s useful to gain an understanding of what you’ll find in a profit and loss statement.

Fortunately, there are common line items that are generally included in most P&L statements. Understanding these concepts will help you put together, and analyze, profit and loss statements.

Let’s go through these terms one at a time.

1. Revenue

All P&L statements start with a summary of revenue from sales that occurred during the given time period.

Usually, this is detailed in a separate table and the sum total is imported into the P&L statement.

2. Expenditure

There are different types of expenditure. Check our table as an example. Usually, more detailed P&L statements will drill down, offering detail into the type of expenditure.

There are many expenses that may be included, but it will vary widely for each individual business.

3. Direct Costs/Costs of Goods Sold

Direct costs (also referred to as the cost of goods sold) refers to costs that can be exclusively attributed to the production or sale of a product or service.

This includes the costs of materials used in manufacturing a product and any labor directly involved in that process. If you don’t manufacture the product that you sell, your direct costs would include the cost of purchasing it from your supplier.

Direct costs exclude all other labor and indirect expenses, such as marketing, accounting, internet service, training, rent, and insurance.

4. Gross Profit (and Gross Margin)

You can subtract direct costs from revenue to determine your gross profit.

Revenue — Direct Costs = Gross Profit

The gross margin is usually depicted as a percentage.

Use this formula to determine your gross margin percentage (also referred toas “gross profit margin”):

Gross Margin / Revenue = Gross Margin %

The gross margin is a key indicator of the financial health of your business and the soundness of your business model. The higher the percentage, the better.

Potential investors will quickly hone in on this number. This number also conveys information about how competitive your business is or can be in the near future.

5. Operating Expenses (OPEX)

Operating expenses (OPEX) are the costs of normal business operations

Operating expenses may include:

  • Payroll
  • Insurance
  • Utilities such as phone and internet service
  • Administrative costs
  • Advertising (and other marketing)
  • Rent
  • Office supplies

6. Depreciation

Depreciation is the reduction in the value of any of your business assets, like machinery or equipment.

Note that depreciation most commonly is an indirect expense, but depending upon the context, it may be a direct cost.

7. EBIT (Earnings Before Interest and Tax)

EBIT stands for earnings before interest and tax. It’s usually one of the last numbers on your statement. There are different EBIT formulas: a simple calculation is to subtract operating expenses and cost of goods (COG) from revenue.

8. EBT (Earnings Before Tax)

Earnings before Tax can tell you a lot about your business performance. Subtract COGs, OPEX, and depreciation from your total revenue to find EBT.

9. Net Income: Profit or Loss

Finally, you calculate the net income, by subtracting your indirect expenses from your gross profit.

This is your net profit — or loss — and the famed “bottom line” of the P&L statement.

You use this to determine if your business is profitable or not, and by how much.

This shows your business’s profit or loss. If you show a loss, it means you spent more than you earned. If you show a profit, it means you made more than you spent.

How to Analyze a Profit and Loss Statement

It’s hard not to be intimidated by your P&L statement. Even if you know the terms, how do you pull together the data to make any significant statements on business progress?

But it’s critical to analyze your profit and loss statements.

A detailed analysis of your profit and loss statement can reveal insights into your business performance, flagging strengths, and weaknesses. Plus, you can also use your profit and loss statement to compare your company against similar businesses and create industry benchmarks.

In fact, the US Small Business Administration suggests printing your P&L statement regularly to monitor business performance.

Performing a P&L Analysis

We’ve gathered some of the most effective ways to perform a P&L statement analysis:

  • Year-on-year comparisons. Take a close look at drastic changes, e.g., drop in sales
  • Studying trends. What’s the trajectory of your business? Are your strategies paying off? Comparing annual performance will help you determine whether revenue is growing faster than expenses, for instance.
  • Projections. Consider using your P&L statement to help project future cash flows.
  • Evaluating margins, e.g., gross profit margin
  • Sales: study your standout months. Are there any particular drivers of success? For instance, did you double down on marketing, causing a bump in sales?
  • Expenses. Are there ways to reduce expenses? What are the biggest expenses? Does this make sense for your business?
  • Income. Are your income sources sustainable?

Examining these numbers can give you a good idea about the financial health of your business.

How Do You Prepare a Profit and Loss Statement?

By now, you might be ready to tackle your very own profit and loss statement. If you don’t feel ready to tackle it yourself, we highly recommend considering online accounting solutions like Quickbooks or Sage Business Cloud Accounting. Both can simplify the process and guide you through the steps we discuss below.

To make your own profit and loss statement, you’ll focus on two accounts:income and expenditure. We’ve collected common business income and expenditure, provided by the Internal Revenue Service.

Here are some examples of the types of incomes sources and expenditure that go into these categories:

IncomeExpenditure
SalesCost of Goods Sold
RevenueSalaries
Interest incomeInsurance
Rental incomeTaxes
Fees for servicesRent
Interest on business loans

To present the information, you have two main options.

First, you can pull together your own statement and create the document using a spreadsheet. Tools like Excel and Google Sheets have templates. We’ve created a simple profit and loss statement template for you to use here. Or, you can use small business accounting software like Freshbooks.

Either way, you’ll need the same data. And the best thing is, you should already have all the data you need.

Let’s have a look at the basic tips to build a profit and loss statement:

  1. Choose a time frame. Will you be assessing business progress monthly, quarterly, or annually? Keep in mind that short time frames probably won’t yield any meaningful data, e.g., anything less than a month. On the other hand, you don’t want to overwhelm yourself by digging into years and years worth of data.
  2. List your business revenue for the time period, breaking the totals down by month. Include your income sources, by month.
  3. Calculate your expenses. Separate direct costs like COGS from OPEX.
  4. Determine your gross profit by subtracting your direct costs from your revenue.
  5. Figure out if you’re making money. Subtract your total expenses from your gross profit. If you get a positive number, your business is on the right track. If not, you’ve identified the biggest problems holding your small business back. Use this insight to set your business on the path to profitability.

Downloadable Profit and Loss Template

Here’s a working profit and loss template complete with gross margin calculation built-in.Simply add your own numbers to the spreadsheet.

How To Prepare A Profit & Loss Statement: It’s Easy With Our Free Template - Digital.com (3)

Profit and Loss Statement Examples

That’s really all there is to it, to wrap up let’s take a look at some basic examples.

The Simplest P&L Example

If you run a solo business with little diversity in revenue or expenses, your P&L statement might be as simple as this:

Business Name P&L Statement – 2020
Revenue$1,000,000
Direct costs$600,000
Gross profit$400,000
Indirect expenses$300,000
Net profit$100,000

The cost of goods sold was subtracted from the revenue to give a gross profit of $400,000.

The indirect expenses were then subtracted from the gross profit to reveal a net income (or profit) of $100,000.

A More Typical Real Life P&L Example

Most small businesses are a bit more complex than that.

Here’s what a more realistic P&L statement might look like:

How To Prepare A Profit & Loss Statement: It’s Easy With Our Free Template - Digital.com (4)

I’ve used the same set of hypothetical data from the simple example to make it easy to see how they line up.

Those five main totals are all bolded, but the income, cost of goods sold, and expenses are all broken down into multiple line items.

There’s one final piece of terminology I’d like to point out in the example. Note that under income, there’s a line item labeled “Less: Returns.”

You will likely see “less” appear if you look up any other examples.

You can prepend “less” to items that are subtracted from the initial value in a section for clarity’s sake.

Frequently Asked Questions About P&L Statements

How To Prepare A Profit & Loss Statement: It’s Easy With Our Free Template - Digital.com (5)

Believe it or not, that’s really all there is to P&L statements.

But even though you understand the core concepts, you may have a few specific questions still. I have answered the most common questions about P&L statements below.

Where are salaries and wages included?

Salaries and wages are the most confusing part of P&L statements. Salaries of people in administrative roles are not directly related to revenue, so they are included as fixed expenses.

It can get tricky when it comes to manufacturing roles. The labor used to directly make a product is included in the cost of goods sold section once the product is sold.

Are unsold inventory labor costs included?

The labor that went into the unsold inventory is not included in the cost of goods sold section. And yet, they are not a fixed expense either, so the labor that went into unsold goods is not included at all in your current P&L statement.

Instead, you’ll include it under the cost of goods sold when that inventory is actually sold, and before then, it’ll be tracked on your balance sheet.

What is the difference between a profit and loss vs income statement?

There is no difference between these terms. Other synonyms for profit and loss statements include: earning statement, revenue statement, operating statement, and statement of financial performance. They all refer to the exact same report we’ve looked at in this article.

What is the difference between profit and loss and a balance sheet?

A profit and loss statement looks at whether or not your business is fundamentally profitable.

On the other hand, a balance sheet is another important financial report to report a business’ assets, liabilities, and shareholders’ equity. Combining the balance sheet with the P&L statement gives you a good overall snapshot of a company’s financial health.

What is a year-to-date profit and loss statement?

Since all P&L statements have to be over a certain time period, a “year-to-date” profit and loss statement covers the current year, up until the time of the statement. Year-to-date P&Ls are often required when filing taxes.

What’s the best time period to create P&L statements over?

Different people (you, investors, lenders) have different uses for your P&L statement.

As a business owner, you don’t necessarily need to create a P&L statement every month (but you can). What’s most important is that you’re checking if you’re on target to reach profitability at least once a month.

What is break-even analysis and how is it used?

Break-even analysis can be performed by using profit and loss statements by working backward to determine how much you need to sell to be profitable in a given period. Since your indirect expenses are fixed, and the cost of goods sold is variable based on how much you sell.

Should you include interest paid on an annual basis in a monthly P&L?

Yes. Many loans have interest rates on an annual basis, so you’ll break down the amount of interest paid to add it to a monthly P&L.

For example, if you have a $100,000 loan at an annual interest rate of 12%, you’ll pay $12,000 of interest over the course of the year. Therefore, you’ll add $1,000 to a monthly P&L.

Where do you include large purchases or inventory on your P&L?

Inventory is not included in your P&L. Instead, it is tracked on your balance sheet as an asset.

What may be included in your P&L is any depreciation on inventory or large purchases, which, depending upon the context, may be included in your indirect expenses section or your direct costs section.

Summary

If all that makes sense, you know just about everything you’ll ever need to know about profit and loss statements for small businesses.

If you’d like to take your accounting basics further, learn how balance sheets and cash flow statements work.

Image 1 Source: Pixabay | rawpixel

Image 2 Source: Pixabay | geralt

How To Prepare A Profit & Loss Statement: It’s Easy With Our Free Template - Digital.com (2024)

FAQs

How do you prepare a simple profit and loss statement? ›

Build a profit and loss statement
  1. Gather necessary information about revenue and expenses (as noted above).
  2. List your sales. ...
  3. List your COGS.
  4. Subtract COGS (Step 3) from gross revenue (Step 2). ...
  5. List your expenses. ...
  6. Subtract the expenses (Step 5) from your gross profit (Step 4).
4 Oct 2019

What is a P&L statement template? ›

A profit and loss statement template — or “P&L” template — is a pre-built financial report designed to help you figure out your company's net income versus your net expenses incurred. This is normally done to help you calculate profit.

How profit and loss account is prepared? ›

A profit and loss statement is calculated by totaling all of a business's revenue sources and subtracting from that all the business's expenses that are related to revenue. The profit and loss statement, also called an income statement, details a company's financial performance for a specific period of time.

What is a profit and loss statement for a business? ›

A profit and loss (or income) statement lists your sales and expenses. It tells you how much profit you're making, or how much you're losing. You usually complete a profit and loss statement every month, quarter or year.

How do you manage profit and loss? ›

How to manage profits and losses
  1. Complete P&L statements for specific accounting periods. ...
  2. Compare statements. ...
  3. Alter your business finances. ...
  4. Meet with a financial professional. ...
  5. Continue to keep records. ...
  6. Create performance benchmarks. ...
  7. Focus on company-wide sales. ...
  8. Monitor cost increases.
4 Aug 2021

Does Excel have a P&L template? ›

You'll find profit and loss templates in Excel are easy to use and configure to any business in minutes—no accounting degree necessary.

Does Google sheets have a profit and loss template? ›

Does Google Sheets Have a Profit and Loss Template? As of now, there isn't a Google Sheets P&L template in the template library for you to use. However, it is extremely easy to create on sheets. Add the revenue, gains, losses, expenses, and net income into the monthly profit and loss template.

How do you calculate profit and loss on a balance sheet? ›

To calculate the accounting profit or loss you will:
  1. add up all your income for the month.
  2. add up all your expenses for the month.
  3. calculate the difference by subtracting total expenses away from total income.
  4. and the result is your profit or loss.

Why profit and loss account of business is prepared? ›

Profit and Loss Account is prepared to find out net result of the business i.e., net profit earned or net loss incurred in the business.

Can I do my own profit and loss statement? ›

First, you can pull together your own statement and create the document using a spreadsheet. Tools like Excel and Google Sheets have templates. We've created a simple profit and loss statement template for you to use here. Or, you can use small business accounting software like Freshbooks.

What is a personal profit and loss statement? ›

A personal profit or loss statement is similar to a business profit and loss statement, except you're accounting for the monthly income and expenses of your household. When you think about it, your household really is run like a business.

Where do I get a profit and loss statement? ›

The P&L statement can be found on a company's website and is one of the financial statements that public companies are required to issue by law to shareholders. 1. The P&Ls for different periods should be looked at in conjunction with the cash flow statement for a more accurate picture of a company's financial health.

Why profit and loss is important? ›

This statement can help you determine if you have enough cash to pay your bills and can predict the amount of cash you'll need to fund your business operations in the future. It's important to note that a business can be profitable but still struggle with cash flow.

Which type of account is profit and loss account? ›

Profit and Loss Account is a type of financial statement which reflects the outcome of business activities during an accounting period (i.e. Profit or loss). Reported income and expenses are directly related to an organization's are considered to measure the performance in terms of profit & loss.

How will you apply profit and loss in your daily life? ›

The primary use of profit and loss in real life is when we go to the market to buy the goods. The accountant essentially uses the concept of profit and loss to calculate the amount of profit that is achieved by their business.

Who is responsible for profit and loss in the business? ›

Profit and Loss (P & L) responsibility is one of the most important responsibilities of any executive position. Having P & L responsibility involves monitoring the net income after expenses for a department or entire organization, with direct influence on how company resources are allocated.

How do you explain P&L in an interview? ›

Show them by example, from past experience how you were able to take on new job responsibilities and challenges and master them. Once you can convince them, by example, that you are capable of quickly learning new things, you will minimize their concerns and it will no longer be an issue for them.

What is the formula of profit and loss in Excel? ›

the formula would be like this in cell C2: =(A2-B2) The formula should read “=(A2-B2)” to subtract the cost of the product from the sale price. The difference is your overall profit, in this example, the formula result would be $120. Then press ENTER.

How do you calculate balance sheet in Excel? ›

Assets = Liabilities + Equity

According to the accounting equation, net worth must equal assets minus liabilities. Balance Sheets are usually calculated after every quarter, six months, one year, or one for each business transaction.

How is net profit calculated? ›

Here are the various formulas you can use to calculate net profit:
  1. net profit = total revenue - total expenses. ...
  2. net profit = gross profit - expenses. ...
  3. net profit margin = ( net profit / total revenue ) x 100. ...
  4. Let's say that in a given period, Company A made a total revenue of $500,000.

Where can I get templates for Google Sheets? ›

Use a Google template
  • On your computer, go to Google Docs, Sheets, Slides, or Forms.
  • At the top right , click Template Gallery.
  • Click the template you want to use.
  • A copy of the template opens.

Does Google sheets have a balance sheet template? ›

Navigate to the Google Docs balance sheet template of your choice. Click "Use This Template," and then enter your Google account credentials if you aren't already logged in.

How do I create a financial statement in Google Sheets? ›

Learn step-by-step
  1. Access Google Sheets and Open a template and identify assumptions.
  2. Set up Transaction Tab.
  3. Define the Elements of a Balance Sheet.
  4. Understand the data being presented in the Profit & Loss Tab and the Dashboard Tab.
  5. Format the charts and make them presentable.

What is the formula for calculating profit in accounting? ›

Finding profit is simple using this formula: Total Revenue - Total Expenses = Profit.

How do you calculate net profit or loss? ›

Net profit is gross profit minus operating expenses and taxes. You can also think of it as total income minus all expenses.

What is the difference between a balance sheet and profit and loss? ›

A balance sheet provides both investors and creditors with a snapshot as to how effectively a company's management uses its resources. A profit and loss (P&L) statement summarizes the revenues, costs and expenses incurred during a specific period of time.

Can you make your own profit and loss statement? ›

First, you can pull together your own statement and create the document using a spreadsheet. Tools like Excel and Google Sheets have templates. We've created a simple profit and loss statement template for you to use here. Or, you can use small business accounting software like Freshbooks.

How do you prepare profit and loss from trial balance? ›

Profit and Loss Account is prepared with the help of Trial Balance.
...
HOW TO PREPARE PROFIT AND LOSS ACCOUNT.
OPENING STOCK OF GOODS250000
PURCHASES500000
SALES900000
FUEL EXPENSES FOR MACHINERY50000
ELECTRICITY EXPENSES – FACTORY60000
48 more rows
22 Jul 2012

Does Google sheets have a profit and loss template? ›

Does Google Sheets Have a Profit and Loss Template? As of now, there isn't a Google Sheets P&L template in the template library for you to use. However, it is extremely easy to create on sheets. Add the revenue, gains, losses, expenses, and net income into the monthly profit and loss template.

How do you do profit and loss in math? ›

Profit = Selling Price - Cost Price. Similarly, in the case of loss, the cost price is more than the planned selling price. Profit % = Profit/Cost Price × 100. Loss % = Loss/Cost Price × 100.

What items are included in profit and loss account? ›

The main categories that can be found on the P&L include:
  • Revenue (or Sales)
  • Cost of Goods Sold (or Cost of Sales)
  • Selling, General & Administrative (SG&A) Expenses.
  • Marketing and Advertising.
  • Technology/Research & Development.
  • Interest Expense.
  • Taxes.
  • Net Income.
7 May 2022

Where can I get a profit and loss statement? ›

The P&L statement can be found on a company's website and is one of the financial statements that public companies are required to issue by law to shareholders. 1. The P&Ls for different periods should be looked at in conjunction with the cash flow statement for a more accurate picture of a company's financial health.

What are golden rules of accounting? ›

Take a look at the three main rules of accounting: Debit the receiver and credit the giver. Debit what comes in and credit what goes out. Debit expenses and losses, credit income and gains.

What is the format of trading and profit and loss account? ›

Trading,profit and loss account and its use

Presentation of this financial statement is in TWO formats, namely; “T” format (also referred to as vertical format) Horizontal format.

How do you prepare a statement of account? ›

The preparation of financial statements includes the following steps (the exact order may vary by company).
  1. Step 1: Verify Receipt of Supplier Invoices. ...
  2. Step 2: Verify Issuance of Customer Invoices. ...
  3. Step 3: Accrue Unpaid Wages. ...
  4. Step 4: Calculate Depreciation. ...
  5. Step 5: Value Inventory. ...
  6. Step 6: Reconcile Bank Accounts.
3 Apr 2022

Where can I get templates for Google Sheets? ›

Use a Google template
  • On your computer, go to Google Docs, Sheets, Slides, or Forms.
  • At the top right , click Template Gallery.
  • Click the template you want to use.
  • A copy of the template opens.

Does Google sheets have a balance sheet template? ›

Navigate to the Google Docs balance sheet template of your choice. Click "Use This Template," and then enter your Google account credentials if you aren't already logged in.

How do I create a financial statement in Google Sheets? ›

Learn step-by-step
  1. Access Google Sheets and Open a template and identify assumptions.
  2. Set up Transaction Tab.
  3. Define the Elements of a Balance Sheet.
  4. Understand the data being presented in the Profit & Loss Tab and the Dashboard Tab.
  5. Format the charts and make them presentable.

What is the formula to calculate profit? ›

Finding profit is simple using this formula: Total Revenue - Total Expenses = Profit.

How do you explain profit and loss to students? ›

Explain that a profit is when a business makes money after expenses. It is the revenue that remains after all expenses and costs have been paid. A loss is the opposite. It is when a business does not make money or a profit after deducting all expenses and costs.

How do you calculate daily profit and loss? ›

Simply put, it refers to calculating the invested amount and received amount. The general formulas for calculating profit and loss are; Profit = Selling price – Cost price. Loss = Cost price – Selling Price.

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