What is a Profit and Loss Statement?
Simply stated, profit and loss statements are an income or operating statement. They are based on a simple formula: sales minus costs equals profit. This formula shows you where your money is going on a day to day basis.
When earning revenue or making a sale, you must deduct the following three things: the cost of what you sold, your operating expenses, and your interest charges and taxes.
However, it’s significant to note that revenue differs from profits. Your Cost of Goods Sold changes with how many items you sell. This includes the inventory you purchased, the packaging, the delivery charges, and any other cost that may vary with volume. To identify how much you have left, you must subtract these costs from your revenue to properly manage your ongoing operations.
The Formula
Revenue – Cost of Goods Sold (COGS) = Gross Profit
Gross Profit is the direct costs attributable to the production of the goods sold in a company.
Expenses You Should Consider
When creating your profit and loss statement, it’s critical that you also include any operating expenses you must pay. Think about rent, utilities, depreciation, employee salaries, and any advertising or marketing costs that are associated with the operation of your business.
The Formula
Gross profit – Operating Expenses and Taxes = Operating Profit
Being Strategic with Costs
When you can see your profits at the end of the period, you’ll know exactly how to move forward with your cash. Whether that’s paying off loans, taking dividends, or saving the money you’ve earned, you’ll know exactly how to spend your earnings. If you are operating at a loss, then you can ensure the period ahead is more successful by making wiser financial decisions.
Importance of Creating a Profit Loss Statement
As an entrepreneur, you may feel like your focus should be on improving your services or products. However, understanding and preparing a profit and loss statement will provide you with insight into any area of your business where you are making or losing money. It can also be useful to find out where you are spending your money so you can cut costs later on.
Being aware of the health of your business is critical. You need to know your revenue and expenses, with the difference being the net profit or loss. By using an accounting system, such as QuickBooks Online, you can access your profit and loss statement to evaluate where you can reduce expenses and grow revenue.
Work with PDR CPAs
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