The cash flow statement, balance sheet, and profit and loss statement are three types of financial documents that every business needs to prepare. It is important for every business owner to have knowledge about these statements to make the right financial decision for the company. In today’s blog, we’ll discuss the importance of a profit and loss statement, how it works, and how one can prepare it. Let’s get started:
What is a Profit and Loss Statement?
A statement of profit and loss offers in-depth information about the financial health of the enterprise over a specific time period. A P&L statement is also known as an income statement, expense statement, statement of operations, earnings statement, or statement of financial results.
Profit and loss reports are different from balance sheets in that a balance sheet gives you information about the company’s financial health at a particular point in time. A P&L statement helps business owners get more visibility into revenue, operating costs, and earnings over a specific time period.
P&L Statement Vs. Cash Flow Statement Vs. Balance Sheet
As a business owner, you need to have these three financial statements to make an informed business decision. However, you need to know the key differences between these three statements:
P&L Statement
With the help of a profit and loss statement, you will have an idea of what’s the company’s income and expenses over a period of time. It offers an insight into the company’s financial health and is usually produced on a monthly, quarterly, or yearly basis. Investors might use a P&L statement along with a balance sheet and cash flow statement to check the profitability of the company.
Cash Flow Statement
A cash flow statement offers comprehensive data that shows all sources of cash flow a business gets from external investment and current operations. Apart from incoming cash, the cash flow statement offers data on cash that flows out of the company, such as investments or business expenses during a specific period.
Balance Sheet
The balance sheet shows the company’s liabilities (what they owe) and assets (what they own). Assets could include sales, cash, accounts receivables, or longer-term assets, such as equipment and property. Liabilities could include wages.
How to Prepare Profit and Loss Statement?
As a business owner, you have to look after various things to run your business smoothly. At this point, you may not have enough time to prepare a P&L statement. For this reason, you can seek help from a professional bookkeeper who will be responsible for preparing a P&L statement on your behalf.
Keep Records of Financial Transactions
Keeping records of all financial transactions is important for accurate records. Bookkeepers can help you stay on top of business books while saving you time, and most importantly, they reduce bookkeeping errors.
Choose a Time Period
Make a decision regarding the time period you wish to assess before creating your business profit and loss statement. The time range must be consistent for the next steps to make sense and give a true representation of your business. P&L reports can cover a month, a quarter, or even an entire year.
Revenue Calculation
Business revenue will be determined by knowing the total amount of money your company has earned. Usually, revenue shows the sales of goods, services, or products.
Expenses Calculation
Now, the bookkeeper will calculate expenses for every item that the business has spent on different items for the company.
Profit Calculation
You can calculate the profit by subtracting your business expenses from the revenue generated by the company. Furthermore, you can determine your net income by subtracting your taxes. Make sure to calculate everything accurately, or you can seek help from a bookkeeper.
Conclusion
The blog highlights the point to make you understand the importance of a profit and loss statement and how it can be prepared. If you don’t know how to prepare it, you can get help from a bookkeeper. Make sure you have bookkeeping solutions to keep your business books organised. You can also get in touch with a Reliable Bookkeeping Services provider to get bookkeeping solutions for your company.