Understanding the Profit & Loss Statement
Updated: Sep 9, 2018
What information can you get from the Profit and Loss (P&L) statement?
Commonly referred to as the income statement, it is a financial statement that summarizes the revenues, costs and expenses incurred during a specific period of time. These records provide information about a company's ability – or lack thereof – to generate profit. Profit is calculated by subtracting expenses from revenues.
Cash vs. Accrual
Revenues and expenses are recognized at the time money is exchanged under the cash basis of accounting. The accrual method of accounting requires that revenues and expenses be recognized at the time services are rendered whether or not payment has been made. Cash basis is common among sole proprietors and small organizations. Large corporations typically follow the accrual method. A CPA can help you decide whether your business should use the cash or accrual method of accounting for tax purposes. The method chosen will be used for all reporting purposes and should be indicated on the Profit & Loss, Balance Sheet, and Statement of Cash Flows.
Cost of Goods Sold
Some companies keep track of direct costs attributable to the goods produced and sold by a business as Cost of Goods Sold (COGS). This is most common in the manufacturing or merchandising industries. Common expenses classified as COGS include material costs and direct labor. Revenues minus COGS equals gross profit. Operating costs such as office expenses, administrative expenses, advertising, R&D, etc. are considered next on the income statement.
Grouping Your Expenses
The financial statement can be as broad or specific as you choose. This is determined by the number and specificity of your Chart of Accounts. A simplified income statement will give you the bottom line but may leave out details that are important to you. A more detailed income statement translates to a clearer financial picture of each individual function of the small business. Some expenses can be broken down into sub accounts, such as utilities, insurance, and travel: Utilities Expense
Errors & Omissions
Net Income and the Balance Sheet
The net income that the business earns over a period of time is transcribed to the equity portion of the balance sheet. At the end of the fiscal year, a closing journal entry is made to transfer net income from the profit and loss statement to retained earnings on the balance sheet.
The income statement begins with an entry for revenue and subtracts the costs of doing business, including cost of goods sold, and other operating expenses. The difference, known as the “bottom line,” is net income, also referred to as profit or earnings. The profit and loss statement is just one of many reports available in Quickbooks Online. Speak with a Quickbooks Online Bookkeeper to learn more about generating the profit and loss statement and ensuring the accuracy of your reports.
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