The Profit & Loss Statement (Income Statement) is compiled from actual business transactions, in contrast to pro forma statements, which are projections for future business periods. The P & L shows where your money has come from and where it was spent over a specific period of time. It should be prepared not only at the end of the fiscal year, but at the close of each business month. It is one of the two principal financial statements prepared from the ledgers and the records of a business.
Income and expense account balances are used in The Profit & Loss Statement. The remaining asset, liability and capital information provides the figures for the Balance Sheet covered on the last three pages. At the end of each month, the accounts in the General Ledger are balanced and closed. Balances from the revenue accounts (numbered 400-499) and the expense accounts (numbered 500-599) must be transferred to your Profit & Loss Statement.
If you use an accounting professional or have a good in-house software program, either should generate a profit & loss statement and balance sheet for you at the end of every month as well as at the end of your tax year. Many owners of smaller businesses set up their own set of manual books. If your general records are set up properly, the transfer of information should still be fairly simple as long as you understand what information is needed and which general records are to be used as sources.
Format and Sources of Information
The Profit & Loss (or Income) Statement must also follow an accepted accounting format and contain certain categories.
On the next page, you will see the correct format and a brief explanation of the items to be included or computations to be made in each category in order to arrive at "The Bottom Line" or owner's share of the profit for the period
.
Profit & Loss Statement
Correct Format and Explanation of Categories Income
1. Net Sales (Gross sales less Returns and Allowances): What were your cash receipts for the period? If accounting is on an accrual basis, what amount did you invoice out during the period? You may wish to have subcategories for different types of sales.
2. Cost of Goods Sold: The cost of manufacturing or purchase of products sold for the period. The Cost of Goods is calculated using a, b, and c below. (a + b - c = C.O.G.) a. Beginning Inventory: Product on hand at beginning of accounting period.
b. Purchases: Material, labor, or cost on inventory purchased during accounting period.
c. Ending Inventory: Product on hand at the end of the accounting period.
3. Gross Profit: Computed by subtracting Cost of Goods Sold from Net Sales. ( 1 minus 2 ) If you are in a service business and do not sell any products, you will not have any cost of goods to compute. Net sales and gross profit will be the same.
Expenses
1. Variable Expenses (Selling): What expenses did you have that were directly related to your product or service? (i.e. - advertising/marketing, freight, fulfillment of orders, sales salaries/commissions, trade shows, travel, vehicles, depreciation (production equip), etc.?
These expenses vary and are usually directly proportional to your volume of business. Divide into sub-categories customized to your business.
2. Fixed Expenses (Administrative): What expenses did you have during the period on office overhead (accounting/legal, insurance, office supplies, office salaries, rent, utilities, depreciation of office equipment, etc.)? These expenses are often fixed and remain the same regardless of your volume of business. They should also be divided into subcategories customized to your business.
Net Income From Operations: Gross Profit (3.) minus Total Fixed (Selling) Expenses and Variable (Administrative) Expenses (Expenses numbers 1 and 2)
Other Income:Interest received during the period Other Expense: Interest paid Out during the period
Net Profit (Loss) Before Income Taxes: The Net Income from Operations plus Interest Income minus Interest Expense. The amount of profit prior to income taxes.
Income Taxes: List taxes paid out during the period (Federal, State, local, self-employment ) Net Profit (Loss) After Income Taxes: Subtract all income taxes paid out from the net profit (or loss) before income taxes. This is what is known as "the bottom line."
Sample Forms:The next two pages contain two Profit & Loss Statement forms. As you will see in the Example 12-Month Profit & Loss Statement, the spreadsheet is divided into columns representing each of the 12 months + 6-month and annual total columns. At the end of your tax year, you will have filled in all monthly columns. After calculating your annual totals, your P&L will be complete. At the end of the year, this form will provide an accurate moving picture of the year's financial activity. The second is a single form to be used for either a monthly, quarterly, or annual profit & loss statement. Blank forms for your own use are provided in Appendix IV.
Genesis Multimedia
For the Year: 2002 6-MONTH 12-MONTH
Jan Feb Mar Apr May Jun TOTALS Jul Aug Sep Oct Nov Dec TOTALS
INCOME
1. NET SALES (Gross less R&A) 14,400 10,140 10,060 15,658 18,622 12,620 81,500 11,500 9,850 10,150 16,600 29,250 51,000 209,850 2. Cost of Goods to be Sold 2,800 2,900 4,200 7,700 7,350 2,750 27,700 2,959 2,580 2,740 6,250 13,400 23,290 78,919 a. Beginning Inventory 27,000 31,000 48,500 48,600 42,000 35,600 27,000 33,800 40,800 40,900 51,700 53,300 54,700 27,000 b. Purchases 6,800 20,400 4,300 1,100 950 950 34,500 9,959 2,680 13,540 7,850 14,800 12,890 96,219 c. C.O.G. available for sale 33,800 51,400 52,800 49,700 42,950 36,550 61,500 43,759 43,480 54,440 59,550 68,100 67,590 123,219 d. Less ending Inventory 31,000 48,500 48,600 42,000 35,600 33,800 33,800 40,800 40,900 51,700 53,300 54,700 44,300 44,300 3. GROSS PROFIT 11,600 7,240 5,860 7,958 11,272 9,870 53,800 8,541 7,270 7,410 10,350 15,850 27,710 130,931
EXPENSES
1. Variable (Selling) Expenses
a. Advertising 900 300 900 250 300 300 2,950 350 300 640 1,300 1,200 1,400 8,140
b. Freight 75 75 75 75 180 70 550 75 75 90 180 300 560 1,830
c. Fulfillment of Orders 300 300 300 400 350 300 1,950 300 280 325 450 600 975 4,880 d. Packaging Costs 2,100 0 0 0 600 0 2,700 0 200 230 0 0 0 3,130 e. Sales Salaries/Commissions 1,400 900 1,300 1,400 1,100 900 7,000 1,400 1,400 1,400 1,400 1,400 1,400 15,400
f. Travel 0 500 700 0 0 400 1,600 0 540 25 80 0 0 2,245
g. Misc. Variable Expense 50 47 73 40 28 62 300 90 73 46 39 74 87 709
h. Depreciation 0 0 0 0 0 0 0 0 0 0 0 0 2,660 2,660
Total Variable Expenses 4,825 2,122 3,348 2,165 2,558 2,032 17,050 2,215 2,868 2,756 3,449 3,574 7,082 38,994 1. Fixed (Admin) Expenses
a. Financial Administration 75 75 75 475 75 75 850 75 75 75 75 75 75 1,300
b. Insurance 1,564 0 0 0 0 0 1,564 1,563 0 0 0 0 0 3,127
c. Licenses/Permits 240 0 0 0 0 0 240 0 0 0 0 0 125 365
d. Office Salaries 1,400 1,400 1,400 1,400 1,400 1,400 8,400 1,400 1,400 1,400 1,400 1,400 1,400 16,800 e. Rent Expenses 700 700 700 700 700 700 4,200 700 700 700 700 700 700 8,400
f. Utilities 200 200 140 120 80 80 820 75 75 75 90 120 155 1,410
g. Misc. Fixed Expense 54 38 42 57 28 64 283 60 72 31 48 45 89 628
h. Depreciation 0 0 0 0 0 2,660 2,660 0 0 0 0 0 2,660 5,320
Total Fixed Expenses 4,233 2,413 2,357 2,752 2,283 4,979 19,017 3,873 2,322 2,281 2,313 2,340 5,204 37,350 Total Operating Expense 9,058 4,535 5,705 4,917 4,841 7,011 36,067 6,088 5,190 5,037 5,762 5,914 12,286 76,344 Net Income From Operations 2,542 2,705 155 3,041 6,431 2,859 17,733 2,453 2,080 2,373 4,588 9,936 15,424 54,587 Other Income (Interest) 234 240 260 158 172 195 1,259 213 303 300 417 406 413 3,311 Other Expense (Interest) 0 0 0 234 233 232 699 231 230 225 223 222 220 2,050 Net Profit (Loss) Before Tax 2,776 2,945 415 2,965 6,370 2,822 18,293 2,435 2,153 2,448 4,782 10,120 15,617 55,848
Taxes: a. Federal 1,950 0 0 1,950 0 1,950 5,850 0 0 1,950 0 0 0 7,800
b. State 350 0 0 350 0 350 1,050 0 0 350 0 0 0 1,400
c. Local 0 0 0 0 0 0 0 0 0 0 0 0 0 0
NET PROFIT (LOSS) AFTER TAX 476 2,945 415 665 6,370 522 11,393 2,435 2,153 148 4,782 10,120 15,617 46,648