How to Create a Profit and Loss Statement

How to Create a Profit and Loss Statement

Learn how to create a profit and loss statement, also known as an income statement, to track your business revenues, expenses, and net income.

A profit and loss statement, also called an income statement, determines whether your business is generating revenue or operating at a loss. Revenues for a given period are listed, and the operating and non-operating expenses of the business are subtracted from them. If the net profit yields a positive amount, the business is profitable. However, if the expenses exceed the gross profit, the business is operating at a loss.
It is important to keep all expense receipts so that you can include them in your expense list. Maintaining records of your expenses allows you to claim them on the income statement. Otherwise, you will lack the supporting documents to prove that you incurred those amounts. Here is how to create a profit and loss statement.

• You will need a sheet of paper, a pen, a calculator, and any pertinent documents relating to the revenues and expenses of the business for a given period.
• Organize your receipts according to expense type. Gather your utility bills together (water, electricity, and telephone bills), employee payroll, rent receipts, office supply receipts, insurance papers, and so on.
• At the top center of your sheet of paper, write "Income Statement (Name of Business), For the Quarter/Year Ended (Indicate Quarter/Year)."
• You will need at least three columns for the income statement, so make sure to leave enough space.
• Under the title on the left-hand side, write "Revenues," which will fall under the first column. Beneath it, list your sources of income and their corresponding amounts. The subtotal of your revenues will go in the second column. Total the revenues and put the final amount in the third column to represent your Gross Profit. If you have only one source of income, write "Gross Profit" opposite the amount in the third column, leaving the second column blank.
• In the first column, below the gross profit entry, write "Expenses." This is where you will list all expenses incurred by the business during the given quarter or fiscal year. Examples include office supplies, utilities, rent, employee salaries, bank and credit card fees, and the cost of goods sold. Each amount should be placed in the second column. Compute all these expenses and write the total in the third column, beneath the gross profit.
• Subtract the total expenses from the gross profit. This will give you your Net Income. The difference will determine the financial status of your business, showing whether you are generating revenue or losing money.

When creating a profit and loss statement or any other financial report—such as a balance sheet—it is imperative to double-check all entries and their corresponding amounts to avoid errors. Income statements for larger businesses help investors and creditors review past financial performance and predict future results, assisting them in deciding whether to continue investing in the company.