A profit and loss statement is revenue and expenses report that is taken over a specific timeframe. This timeframe could be a quarter or fiscal year or another predetermined timeframe that needs the profit and loss statement, also known as an income statement. The profit and loss or income statement’s main purpose is to report whether your company may profit gains for profit losses during the reporting period.
The profit and loss statement can help with your business taxes when building your business credit and give your shareholders an overview of the gains and losses over a period. This statement is included in some accounting and bookkeeping software, and there are easy to use templates available online and within document creation software.
Types of Profit and Loss Statements
Pro Forma
Though your business will not have any profit or expenses to report, you should still have a profit and loss statement at the beginning of your business included in your business plan. This would be a projection of the expected gains and losses of your company. When someone is looking to invest or lend capital to your company, having a profit and loss statement can help put your company’s financial aspect into perspective.
Periodic
Because a profit and loss statement can be of great value when determining your company’s gains and losses, they should be prepared at regular intervals. They can be done monthly, quarterly, or yearly. However, the more frequent you create a profit and loss statement, the better so that you will always know your business’s financial health. It is also helpful to determine where expenses can be cut, and marketing focus needs to increase profit.
Periodic profit and loss statements can also be done upon demand as needed for tax purposes or to inform investors, lenders, or shareholders as needed. Profit and loss statements are useful for a multitude of reasons.
What Information Goes on a Profit and Loss Statement?
Income
- Sales Revenue
- Affiliate Commissions
- Rent and Lease Payments
- Royalties
- Non-Operating Income
- Gains
Expenses
- Operating Costs
- Costs of Goods Sold
- Depreciation and Amortization
- Taxes
- Interest Paid on Debt
- Cash Receipts
Why You Need a Profit and Loss Statement?
The main purpose of a profit and loss statement is to give an overview of your business gains and losses. There are many reasons why you may need a profit and loss statement. Here are some of the reasons:
- Tax preparation
- To improve your bottom line
- To prepare a budget
- To obtain financing
- To improve business credit ratings
- To assess business growth
The profit and loss statement is a tool that will help give your company, investors, lenders, and shareholders an overview of what the company is making and what the company is losing. This can help the company decide whether they need additional funding, cutbacks on spending, or increased marketing.
Conclusion
For your business’s long-term success, you must regularly produce a profit and loss statement. The Profit and Loss will help you and your business track the financial health of the company. This knowledge of your financial health will let you and your stakeholders know if you need to keep the same areas and the other areas you need to change.
Because of the importance of the profit and loss statement, if you are not confident about creating one, you can hire a professional accountant to help you create one. If you cannot afford to hire an accountant, software or templates are available online. It is fairly simple to create a profit and loss statement.
The most important takeaway is that profit and loss statements are essential to running a business. You need to be sure they are produced and used regularly to be on top of your business’ financial health. If you need to improve or other areas, you need to increase your focus. These regular statements will ensure you know exactly what is going on financially in your business.
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