If you are someone who has just started their own independent business, for example, a restaurant or barbershop, then you might not be very well versed in finance and the way bookkeeping takes place.
A profit and loss statement is one of the basic concepts of business finance and to make it easier for you to understand, we have written the article below. If you, however, are looking for information or automatic bookkeeping, then look for MYOB bookkeeping as it will answer all your questions.
A profit and loss statement is a financial statement that is created to measure the total income and total expenses of a business over a certain time period. Hence, it is also at times known as the income statement or the statement of operations.
The goal of such a statement is to measure the profits that have been earned by the company and that is done through the exclusion of the expenses from the income. This then gives you the overall financial health of the company. The article will cover a few basic questions one may have on a profit and loss statement below.
- What is a P&L statement
The profit and loss statement has information on the expenses and the revenues of the business. These statements then can be generated according to the company’s needs weekly, monthly, quarterly, half-yearly, or even yearly. The basic formula that is used within this sheet is:
Revenue – Expenses = Profit
- What does the statement show?
This statement that you create is a very important statement that is used by business owners or financial accountants in their processing. This is because this report gives insight into the net profit that the company has achieved based on your revenue and expenses. It then helps the company understand where the costs are coming from and how they can cut down on them, while also showing them how revenue can be driven. This in turn then helps them allocate resources and the budget efficiently so that they can drive up the revenue while cutting the costs.
- Components within a P&L statement
- Revenue: Revenue is the net sales or the turnover the business has had over a specific period. This includes the revenue that you earn from the primary business activities as well as the non-operating revenue you may be gaining.
- Cost of goods sold: this is the representation of the goods and services that the company has used.
- Gross Profit: this is the gross profit that is earned after you exclude the cost of sales made.
- Operating Expenses: these are all the costs that a company incurs during this period, from administrative to general selling expenses. It is also inclusive of rentals, payroll, utilities, and any other expenses that you may have during this specific period.
- Net Profit: this is the total amount that one has earned in the specific time after the subtraction of the expenses incurred. To calculate it, all you need to do is subtract the total expenses from your gross profit.