A profit and loss statement, often simply referred to as a “P&L” statement, is a document similar to a balance sheet, which is created to reflect a business’s sales and expenses over a defined period of time (SBA, 2015). To record this information accurately in a P&L statement, all expenses relating to a business’s revenue must be subtracted from the total amount of revenue (White, Sondhi & Fried, 1998). The resulting number can be either positive or negative, indicating either profit or loss during the relevant period. The benefit of this simply prepared document can be instrumental to all businesses, but it can be particularly beneficial for newly established businesses.
Purpose of P&L Statements
Not only does a P&L statement help a business discover if the company is in the red or in the black, it also aids in operation monitoring (White, Sondhi & Fried, 1998). A newer business, still in the ramping up phase, might find it beneficial to conduct P&L evaluations frequently, either quarterly or even monthly (SBA, 2015). It can provide valuable insight into where adjustments need to be made in order to maintain or increase profits. Also, a P&L statement can be used to help investors determine if the company is being well managed, using resources well, and able to turn a profit (SBA, 2015).
Furthermore, and perhaps most importantly, a P&L statement is required by The Internal Revenue Service (IRS, 2015). In fact, a company’s P&L statement is the only required financial statement the Internal Revenue Service uses to asses taxes on profits earned (IRS, 2015). As such, it is imperative the information within the document is cohesive and accurate. There are standardized items which must be detailed in the P&L report w...
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...ive, and general expenses for your business on the P&L statement. Next, subtract each expense from the gross margin. The resulting figure is referred to as the net operating profit.
The net profit is the amount of overall financial gain a business has earned during the relevant period. This amount is not obtained until all costs, deductions, and taxes have been considered (Bargate, 2012). The counter part to net profit is net loss. Net loss would be the totally loss including any taxes or fees the business lost over the relevant period.
How to calculate net profit. Compile every other expense for the business into the P&L statement. Subtract each expense from the net operating profit. The outcome is referred to as the net profit before taxes. Continue by subtracting the amount of taxes owed. This final calculation results in the business’s net profit.
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