Profit and loss statements are the bane of many people’s existence. Many business owners feel like they need to have an accounting degree to decode it. Because you’ll need to create them for your business, you should know exactly how they work. Here’s the purpose of this statement and how you should be compiling it. You’ll soon see how improving it can make your life easier.
What Is It?
A profit and loss statement (also called an income statement) shows what you’ve earned from sales after deducting expenses. That is total sales – expenses = profit. For example, here’s how a restaurant would generate its profit and loss statement. It would first calculate the sales total (from sitting customers, catering services and takeaways). Then, it would deduct all the costs of running the restaurant. The remaining figure will be its net profit or net revenue made. If its expenses outweigh its sales, then, unfortunately, the business is making a loss.
A profit and loss statement can be compiled every month, every quarter, or every year. Each business owner can choose how often to create an income statement. For example, a new business might create one monthly to determine what is and isn’t earning money. A successful business that’s a decade old might only compile a report every year.
What Can I Do With It?
Businesses use profit and loss statements for many different reasons. Its used as a financial statement in a business plan that displays profit and loss cycles over time. It’s used when a business owner is applying for financing or is looking for an investor, as viewing the document will help interested parties determine the health of the business. Profit and Loss documents are also used to prepare for tax season and could result in your business enjoying a tax rebate or deduction.
A profit and loss statement is a document that’s helpful to keep on hand for your business. It’s worth taking the time to make sure yours is correct and up to date. Doing so will save you from tax complications down the line. It will also help you find funding faster and will impress prospective business partners.