Understanding Financial Statements - Income Statement (P&L)

 Small business accounting requires much more than developing financial statements for review, but these statements when information is recorded correctly can show….

The financial position of a business

The results of operations for a specific time period

Statistical information such as the best-selling item or gross profit margin

Information about customers, vendors, and employees

But first, you need to understand the two basic forms of accounting, and whichever one you employ will determine how the income statement is reviewed.

Cash-basis reports

A Cash -basis accounting system reports cash flow as it comes in and as it goes out. That means as you receive cash, checks, or credit card payments, the revenue is reported the day it was received. All expenses are recorded as they are paid. 

This is probably easiest to understand because it is basically like managing your checkbook ledger. When you get paid or deposit money into your account you add that to your ledger, and when you write out a check to pay the electric or use your bank card to purchase something you report it to the ledger.

Although this is an acceptable accounting practice for small businesses, it is probably not the most efficient to grow your business and keep track of any receivables or expenses. But with that said, most accounting systems will allow you to print the report in various ways no matter what system of accounting you are using. Printing a report on a cash-basis will provide you a quick overview of your cash flow.

Accrual-basis reports

These reports display income at the time it was invoiced and expenses at the time they were purchased, regardless of when the payment occurred. This system records and tracks all your receivables and bills payable which allows you to better budget yourself and account for the cash flow.

 

The P&L Report?

The profit and loss statements contain summarized information about revenue and expenses. Based on the standard operating procedure of a business, these statements can be generated on a weekly, monthly, quarterly or annual basis.

The basic formula of a P&L report is:

Revenue – Expenses = Profits

What Does the Profit and Loss Statement Show?

The profit and loss report is an important financial statement used by business owners and accountants. The report shows information about the net profit based on your revenues and expenses. It details the ability of a business to manage its profits by cutting costs and driving revenue.

The P&L report also allows you to investigate revenue and expense trends, cash flow, net income, and overall profitability – to then allocate resources and budgets accordingly.

The P & L is very similar to the information that is needed on your business portion of your tax returns which determines how much money is owed or refunded.

Components of a Profit and Loss Report

  1. Revenue: This entry represents the net sales or turnover during the accounting period. It includes the revenue earned from the primary business activity of the entity along with the non-operating revenue and gains on the sale of long-term business assets.

  2. Cost of Goods Sold: It represents the cost of products and services.

  3. Gross Profit: Also known as gross income or gross margin, the gross profit is net revenue excluding costs of sales.

  4. Operating Expenses: Operating expenses are administrative, general, and selling expenses that are related to running the business for a specific period of time. This includes rental expenses, payroll, utilities, and any other expense required to operate the business. Also included are non-cash expenses such as depreciation.

  5. Operating income: It refers to earnings before taxes, depreciation, interest, and authorization. Deduct operating expenses from your gross profit to calculate operating income.

  6. Net Profit: It is the total amount earned after deducting the expenses. To calculate net profit, subtract the total expenses from your gross profit.

HOW TO CALCULATE PROFIT

To find the net profit (or net loss) of your business, here are a few simple steps.

Gross Profit = Net Sales – Cost of Sales

Net Operating Profit = Gross Profit – Operating Expense

Net Profit before Taxes = Net Operating Profit + Other Income − Other Expense

Net Profit (or Loss) = Net Profit before Taxes − Income Taxes

PROFIT AND LOSS REPORT SAMPLE

A P&L starts with a header that contains the name of your business and the accounting period.

This is followed by:

Income

Expenses

Net Profit

Example profit and loss statement

Total revenue                         $1,000,000    100%

 

Cost of Goods Sold  (less)    $  426,200     42.6%

 

Gross Profit                              $  573,800     57.4%

 

 

Expenses

 

Accounting and legal fees     $   11,700

 

Advertising                                $   15,000

 

Depreciation                               $   38,000

 

Electricity                                    $    2,700

 

Insurance                                     $   15,200

 

Interest and bank charges        $   27,300

 

Postage                                        $    1,500

 

Printing and stationery              $    8,700

 

Professional memberships       $    1,800

 

Rent for premises                        $   74,300

 

Repairs and maintenance          $   21,100

 

Training                                          $    6,900

 

Vehicle operating costs              $   20,000

 

Wages and salaries                      $  223,500

 

Workers compensation                $    6,500

 

All other expenses                        $   14,100



Total Expenses                              $  488,300     48.8%

 

Net Profit (BOS)                            $   85,500      8.6%



BOS = Before owners salary 

The above income statement shows the various expenses, income, and net profit. Although this gives you an idea about the goings-on of the business, and if reviewed regularly you will be able to locate areas where there may be something wrong. This statement should just be a review because it will not expose problems until they reach an excessive level or you may never foresee the problem s at all.

This statement, however, is important for lenders, investors, and others who may have an interest in the company. Although they may review the entire document to see how and where the money is expensed, their biggest interest is the bottom line. 

Many small business owners become frustrated because they try to get a low-interest bank loan or Line of Credit, and are consistently denied. The reason for this is that their financials are not acceptable, mostly because they show a loss to pay no tax. Lenders look at the profit of the company to figure out the loan amount and payment the business can afford. Showing a loss shows that the business can not handle more debt.

In our next article, we will review the Balance Sheet. As we move through the series we will try to dive deeper into what is needed from an accounting standpoint to get into the nuts and bolts of the cash that comes in and what goes out. Having the right accounting support will help you grow your business, provide you a deep understanding at your fingertips while providing you the freedom to concentrate on the growth of the business.

Contact Ebizmore Accountants and Advisors for a free analysis on how they can save you money, build profits and help you reach your goals. Ready? Contact us at accounting@ebizmore.com or visit us at https://ebizmore.org/

Commercial Financing for All Your Real Estate Needs

Hard Money * Fix and Flip * Transactional Funding

Programs

Conventional Financing * Stated Income * Mezzanine Loans *International Loans * Corporate Loans * 1031 Exchange * Full Documentation * Cash Out Refinance * Lines Of Credit * Hard Money * Fixed Rates * Construction Loans * Acquisition & Development * Equity Financing * Remodel-Renovation *Joint Ventures * Green Energy Loans * Foreign Nationals * Cross Collateral * Distressed Borrowers * Bridge Loans

Property Types
Apartment * Multifamily * Self Storage Facilities * Office Buildings * Land & Development * Warehouse * Retail Centers * Mobile Home Parks * Resorts * Restaurants * Mixed Use * Convenience Stores * Gas Stations * Car Wash * Hospitality Hotel/Motel * New Residential Development * Golf Courses/Marinas * Auto Body Repair * Industrial * Special Purpose Properties * Medical

Contact Us To Learn More

The Most Fluid Accounting and Advisory Service Available For Small Business.

Only 30% of Small Businesses Utilize an Accounting Service.

But Did You Know That Ebizmore Accounting and Advisory Services Will Save You Money, Increase Profits, and Ensure Your Success.

Bank & CC reconciliation,
Accounts Payable
Accounts Receivable
Financial Reports
Payroll
QuickBooks catchup/cleanup
Invoicing
Compliance reporting
QuickBooks Online
Much, much, more.
+++Business Credit Builder

We Do What It Takes and the Proof Is In the Numbers!

Visit
or
Email Us

Equipment Financing
$0 Down

Easy Qualify

Start Up Financing
Medical Equipment
Business Equipment
Computer
Construction Equipment
Fitness Equipment
Brewery Equipment
Heavy Equipment
Office Furniture/Equipment
Restaurant Equipment
Vehicles
+++More
Terms to 78 Months
All Industries and All Credit Considered

Overwhelmed by Business Debt?

Let us negotiate and consolidate. Reduce what you owe by up to 60% or more.

We Get You Back On Track

* No payments for 30-60 days
*Save Thousands
*Maintain and Build Credit

Merchant Cash Advance & Other Business Loans

Reverse Consolidation
-Daily Savings up to 40%

Have Defaults and Need Emergency Funding

Flexible Payback Options
No Industry Restrictions
We will set up flexible funding options for all Businesses.

Business Lines of Credit
For Starter & Advanced

LOAN AMOUNTS – $10K to over $1M
LOAN TERM – 3 months to 10 Years
INTEREST RATES – 6% – 25%
SPEED – Under 24 hours (in most cases)

  • Only pay interest on funds drawn
  • Capital is available when needed

All Credit Grades Accepted
Minimum 3 Months In Business

We Do SBA Right!

SBA Working Capital Loan

up to $5 million

start-up, acquisition or expansion

working capital, purchase real estate, equipment, inventory, etc.

SBA Express Loan

$25,000 and $350,000 in quick cash

Revolving Line of Credit
or
Term Loan

SBA 504

Owner-Occupied Commercial Real Estate Financing

Up To 90% Of Cost

Competitive fixed rates

Amortizations from 30 years

Non-recourse

30-day closings

Business Financing with Easy Qualification

Get up to 250k Funded in 24 hours

FICO Down to 500
Monthly Payments
2-10 Year Terms
Consolidate Other Debt
3 Months in Business
No Pre-Payment Penalty

Contact Us to Get Started Today