ACCOUNTING 101: the BASICS, Profit & loss

As part of our Accounting 101: The Basics series, we will be going over some of the reports that are important to review for your business more in detail. One of the most important reports for you to review as a business owner is the Profit & Loss (P&L) or Income Statement. Let us dive into what is a P&L report. The 2 types of P&L reports. Why this report is essential for your business. Lastly, some details about this report to consider.

“One of the most important reports for you to review as a business owner is the Profit & Loss (P&L) or Income Statement. ”

What is a Profit & Loss (P&L) report:

The P&L or Income statement is a very crucial report to review the status of your business in any given period of time. The report summarizes the total income and total expenses of your business. This report can be broken down by week, month, quarterly or accumulated YTD (Year to date). In simple terms, this report will show if your business is making money or loosing money in any given period.

TYPES OF P&L REPORTS:

There are two ways to prepare a P&L report. The two methods are:

1. Cash Method: This method is just as the name suggests, when actual cash goes in and out of the business. The income and expense are only recorded when cash is received or whenever cash is used to pay for any expenses. This method is more commonly used for smaller businesses.

2. Accrual Method: This is the most common used method in business. It refers to the company accounting for income that has not yet received but the products or services have been provided or expenses that the business has not yet paid.

details of the Profit & Loss (P&L) report:

Now that we know what the P&L report is, let us go over some important details in order to understand this report in more detail from top to bottom.

1. Income: On the top line of the P&L you will have all revenue for the period chosen. This is all of the net sales, revenue earned from the primary business activities that can be products or services offered.

2. Cost of Goods Sold: Below the income received, you will find the COGS. This will represent the cost to produce the goods and services that you provide.

3. Gross Profit: The Gross Profit which is also known as Gross Margin or Gross Income which is calculated by taking:

   1. INCOME - COGS = GROSS PROFIT

4. Operating Expenses: In this category you will find all of the added expenses to operate and run your business. These expenses can be utilities, rent and payroll just to name a few. In certain cases, these expenses may also include what are considered non-cash expenses such as depreciation which can be beneficial depending on your business.

5. Operating Income: This is calculated by deducting the operating expenses of the business from the gross profit. This will be the operating income of the business before taxes, depreciation and interest. The net operating income will give you a day to day picture of how your business is doing without any added expenses or income that do not have to do with your regular expenses to run your business. Operating income is calculated by:

   1. GROSS PROFIT - EXPENSES = NET OPERATING INCOME

6. Additional Expenses & Income: Depending on your business, you may have added investments, interests, long-term assets or any expenses that are not regular to your day to day operations of the business that may be best to keep separate from your other expenses.

7. Net Profit: This will show you either a Profit or a Loss depending on the status of your business after all information has been correctly entered in the categories above. A positive net income means that you have a profitable business, a negative net income, means you have some decisions to make in order to control the losses. The Net Profit is calculated by:

   1. NET OPERATING INCOME - OTHER EXPENSES + NET OTHER INCOME = NET INCOME

What is the importance of P&L report:

This report is essential for your business. It will provide a clear picture if your business is making a profit or if it is losing money. With this breakdown, you will be able to review and make decisions of where you need to cut if need be, where the majority of your money is going and a breakdown in detail of all income and expenses. In addition, the information on this report can be used to do your quarterly and annual reporting that must be provided.

The P&L Statement is one of three important financial statements. It will allow you to make proper decisions. The P&L can be created manual with the correct calculations or there are programs that can be used to create these reports for you as you input the proper information. In the next blog in this series we will be going the next important report to know, the Balance Sheet. Not sure how to properly manage your P&L? Let us know so we can assist in organizing your business the right way.

As always, sending positive vibes your way 🙏

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