A profit and loss statement is one of several documents businesses produce to demonstrate the financial health of a company. Typically created quarterly or annually, this statement shows how much revenue a business took in during the reporting period, as well as its expenses and net income.
Profit and loss statements can be incredibly useful to business owners to show them where they might need to make changes. Potential investors also consider this statement carefully when deciding whether a company makes a good or poor investment risk. The statement of cash flows and the balance sheet are two additional essential financial documents for any business.
What to Include on Your Profit and Loss Statement
The terms used to on a typical profit and loss statement may sound foreign to you, especially if you have never read or created one. We recommend familiarizing yourself with the terms below, whether you plan to produce the document in-house or outsource this task to a firm like Chicagoland CPAs.
Cost of Goods Sold
Since no company makes 100 percent profit on items sold, it’s important to determine the actual profit from each item. You do this by adding the cost of materials and labor and subtracting it from the retail price.
Depreciation
All equipment loses value over time. Fortunately, you can take a depreciation write-off on your tax return.
Earnings Available for Common Shareholders
This shows the net profit after taxes, less dividends paid to preferred shareholders. However, it only applies if you draw a salary from the company or it has investors.
Earnings Before Interest and Tax
Also known as operating profit, you determine EBIT by subtracting your company’s operating expenses from its gross profit.
Earnings Before Tax
To arrive at this figure, you must deduct the cost of goods sold, operating expenses, depreciation, and interest from the total revenue of your company.
Expenditures
This should include any expense you incur to operate your business.
Gross Profit
Your company’s gross profit is the amount remaining when you deduct the cost of goods sold from its revenue.
Net Income
This is the number that business owners and investors care about the most. It’s the figure remaining after subtracting all expenses from all sources of income. While the goal is to post a profit, it’s not uncommon for new businesses to show a loss instead. This is especially true during the first few years after launching the company.
Operating Expenses
This refers to any expenses incurred not included in the cost of goods sold category. Advertising, training, and utilities are just three common examples.
Owner’s Draw
This is your salary if it comes out of the company’s total revenue.
Revenue
Any money earned from sales, tax refunds, or selling property count towards company revenue.
Learn How to Make the Best Use of Your Company’s Profit and Loss Statement
It isn’t always easy to know how to use the data from this financial statement, even if you produce it yourself. Chicagoland CPAs can help. Please contact us today if you need help preparing or interpreting this statement or with other business financial matters.
