How To Create a Profit and Loss Statement

Learn the components and calculations involved

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A profit and loss (P&L) statement, also known as an income statement, is a financial statement that summarizes a business’s revenue, costs, and expenses during a specific period of time. A P&L statement provides a clear picture of a business’s financial performance and profitability to owners as well as potential investors and lenders. In addition, it can play a crucial role in helping business owners make more informed business decisions and plans. 

In this article, we’ll go over how to create a P&L including the components and fairly simple calculations involved.

Key Takeaways

  • A profit and loss (P&L) statement is a financial statement that summarizes the revenues, costs, and expenses incurred by your business during a specific period of time. 
  • Sole proprietors and small business owners should generate more frequent P&L statements (monthly or quarterly) to better monitor business activities. 
  • Critical components of a P&L statement include total revenue, cost of goods sold (COGS), and operating expenses. 

How To Create a Profit and Loss Statement

If you’re a sole proprietor or small business owner who is directly involved in day-to-day finances, it may be more helpful to generate monthly or quarterly P&Ls to help you organize and monitor your business activities.

To create a P&L statement, there are a few key steps to follow and financial components to calculate, which are outlined below.

Calculate Your Revenue  

A typical small business owner should add up the total revenue earned for the time period of the P&L, which if you’re creating it quarterly, will be for 90 days. It includes: 

  • All money earned through services rendered or sale of goods
  • Non-recurring revenue from the sale of something like an old company van, rent received on property or equipment

Calculate Cost of Goods Sold (COGS)

The cost of goods sold (COGS) represents the direct expenses incurred in the production of goods or services including labor, materials, and shipping. For example, imagine you own a bakery business. 

Think of COGS as the ingredients you’d have to buy to make a cake, hire a baker, and deliver the pastry. 

Determine Your Gross Profit 

In a P&L statement, the total COGS is subtracted from total revenue to determine your gross profit.  Assume you still own a bakery and sell $1 million worth of pastries, while the breads, cakes, and muffins cost $426,000 to make. Using the basic formula, here’s how you would come up with gross profit:

 $1,000,000 (Revenue) - $ 426,000 (COGS) = $574,000 (Gross Profit)

Subtract Operating Expenses

For this fictional bakery’s P&L statement (and those of other small businesses), there are typically several more operating expenses to factor in beyond COGS as shown in the table below. The total amount of these expenses will be charged against that $574,000 gross profit figure. Here’s a modified example of a typical expense sheet provided by an Australian government agency:

Operating Expense           Cost
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                             
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
Miscellaneous expenses $14,100
Total Expenses $488,300

Determine Net Profit

Once all your amounts have been totaled for both gross profit and operating expenses as well as EBITDA, here is the simple calculation to figure out your net profit.  

$574,000 (Gross profit) - $488, 300 (Operating expenses) = $ 85,700 (Net profit)

Frequently Asked Questions (FAQs) 

What’s the difference between a profit and loss statement and a balance sheet?

While a P&L statement and balance sheet are both critical financial statements for small businesses, there are some key differences. For instance, a P&L statement shows the profitability of your business over a defined period of time, while a balance sheet provides a “snapshot” of the business's performance as of a given date. In addition, the latter not only includes your business's assets and liabilities, but also the owner’s equity in the business and any long-term investments.

How do you create a projected P&L? 

The key word here is “projected,” meaning this type of P&L provides an estimate of what your revenue and expenses are going to look like in three months, 12 months, or any period you are attempting to project. The results are based on your business’s historical financial performance and research on what’s going on in that market (i.e., is it booming or waning, is the company expecting a great product breakthrough, and so on). The projected, or “pro forma,” P&L statements can be useful to potential lenders and in-house financial managers. 

How do you create a P&L statement if you’re self-employed?

When you complete a Schedule C (Form 1040) as a self-employed individual or sole proprietorship, you are in effect creating a year-to-date P&L statement of your self-employed activities, which is required by the IRS. By filling out this form, you’ve added up all your income for the period. Assuming you have not rented an office, you’ve also calculated what percentage of your home you’ve used based on the rent or mortgage. In addition, you’ve figured out what portion of the home utilities you can charge to your business, what you’ve spent on gas and transportation for business, and so forth.

By taking these steps, you are well on your way to breaking out your revenue, COGS, gross profit, operating expenses, and net profit to create a P&L statement for yourself as well as the IRS and potential lenders.