If you are running a small business or using small business accounting software it’s imperative you comprehend whats in your profit and loss statement. And if you are like me and you learn better from watching video, you’ll find some tutorials on Youtube in the Small Business Heroes channel.
The profit and loss statement reports how much you’re selling, how much you’re spending and how much profit you are or aren’t making over a specific time period.
The Profit and Loss or P&L is often referred to as the Income statement, it tracks and reports the financial activity of your business over a period such as a month or a quarter.
Here is a simple explanation of how the profit and loss report is assembled and how it’s key components work.
I will walk you through the format and order in which a profit and loss report is displayed by most small business accounting software
I’ll also explain some of the math’s that happen behind the scenes to calculate the profit and loss punch line – How much Profit you are or aren’t making.
Just one important point before I begin. You will never ever be able to tell how much cash you have from looking in the Profit and Loss. Making a profit doesnt neccessarily mean you have cash in the bank. The cash balances are reported in the balance sheet.
Always first is Sales (in other words how much you’ve sold),it’s also known as Income or Revenue and is always shown at the top of the profit and loss report generated by your small business accounting software The balance or amount on this line is derived from your Income Accounts.Remember, Income Accounts contain a history of transactions directly associated with what you have sold.
So if you’re reporting by month and in March you invoiced or sold 1,000 worth of Products or Services. The balance on this line for March will be 1000,00.
Each line in this top section represents the sum of the transactions over the time period you specify when you run the profit and loss report
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