Even if you don’t have to borrow money from any lender or a bank for starting your independent business, you will require multiple financial statements for helping you to make decisions. Profit and loss statement (abbreviated as P&L) is the most significant financial statement for any business. Sometimes, it is also referred to as an income statement.
What is a P&L Statement?
A profit and loss statement reveals the expenses and revenues of the business, and also resulting loss or profit, over a specific period of time (a quarter, one month, or one year).
When do you have to prepare a P&L Statement?
Every business feels the need to review its losses and profits occasionally, at least once in every four months. This will help you prepare the tax return for your business. Based on the information from your P&L statement you can calculate the net income and determine what amount you have to pay as income tax.
Information needed for preparing a Profit and Loss Statement:
You can get most information for the P&L statement from the monthly budget of the first year and from calculated estimates on depreciation from the tax advisor. To be specific, you will need:
- A transaction listing containing details of all transactions registered in your business account as well as the purchases you have made with the help of your business cards.
- Include other minor cash transactions for which you store receipts.
- You will also require information about reductions like returns or discounts to be accurate.
- For income, all you need is a proper listing of all the income sources – credit, checks and cash payments. You can easily find these if you follow your bank statements.
If you use business accounting software, you’ll find the profit and loss statement along with your standard reports.
Including cash transactions in your P&L report:
Do not forget to include the cash transactions, both expenses and income. Business accounting software makes your job easier. But, you still have to manually submit the details of cash transactions.
In case you accept cash from your customers, using a cash transaction form is a good idea. This way, you can save the receipt for every cash payment in a distinct folder. These receipts are particularly important for expenses behind business meals and business driving.
Steps for preparing a profit and loss statement:
Follow these simple steps for preparing your business’s P&L statement like a pro:
- At first, show the net income of your business for each quarter. You can break it down into sub-sections for showing income from various sources if you like.
- Then it is time to itemize the business expenses for every quarter.
- After that, calculate the difference between Sales and Expenses and that is the Earnings. This is known as EBITDA or ‘earnings before interest, taxes, depreciation, amortization).
- Then show the total annual interest on the business debt.
- List the estimated taxes on your net income and subtract.
Finally, calculate the total depreciation for the year.