Whether you’re running a successful business or just starting out, chances are that you know how much of a difference financial statements can make when it comes to attracting investors or applying for loans.
As one of the three pillars of financial reporting, the P&L report provides information about the business’s progress, and trends in its development to help identify strong points that drive the business forward, as well as weak spots that require special attention.
Let’s take a closer look at what a profit and loss statement (P&L) is, how exactly it works, why your business needs it, and the way automatic accounting software can help you manage it.
In this article we’ll take a closer look at:
What’s a profit and loss statement (P&L): definition
A profit and loss statement is defined as a financial statement that provides a record of the revenues, expenses, and profits/losses incurred by a business over a specified time frame, typically issued monthly, quarterly, and annually. This type of financial statement is prepared using the cash or accrual accounting method and gives information about how much your business is making or losing.
A profit and loss statement can sometimes be referred to as an income statement, expense statement, earnings statement, statement of operations, or statement of financial results.
Regardless of the name, P&L statement is a valuable source of information about the financial health of your business, so you should know exactly how it works.
Profit and loss statement vs cash flow statement and balance sheet
The P&L statement is one of the three financial statements every public company has to release every quarter or fiscal year, along with the balance sheet and cash flow statement. Let’s break down the differences so that you know why you need all three.
Profit and loss statement vs cash flow statement
The P&L statement shows the overall performance of your business – revenues, total expenses, profits, and losses, while the cash flow statement demonstrates how these profits or losses flow through your business.
The cash flow statement shows the amount of cash inflows and outflows over a specific time frame, which means that you can see whether your business generated cash or not.
As you can see, your income statement and cash flow statement are closely connected and reflected on your balance sheet.
Check out our article on the differences between direct and indirect cash flows.
Profit and loss statement vs balance sheet
While the P&L statement shows the income, expenditures, and profitability of your business over a specific period, the balance sheet gives you an overview of the assets, liabilities, and shareholder equity of your business up to a given date.
The balance sheet is usually used to understand the financial position of the company and specifically to compare the amount and quality of assets against liabilities – how much a business owns and owes at a single moment. That’s why it’s extremely important for investors and creditors as they evaluate the resources of your business and how effectively they’re managed.
Check out our article on what a balance sheet is from a business owner’s perspective.
Now that you know the difference between the three basic financial statements – profit and loss, balance sheet, and cash flow statement – let’s focus on your income statement and why you need it.
Is my business required to prepare a profit and loss statement?
If your company is publicly traded, you’re required to prepare a P&L statement and file this and other annual financial reports with the Securities and Exchange Commission (SEC). When you prepare these financial reports, you must comply with generally accepted accounting principles (GAAP). The financial information disclosed in your income statement is further evaluated by regulators, analysts, and potential investors.
While public companies are required to prepare an income statement, private companies, especially very small ones might not. Hence, sometimes those small businesses choose not to prepare formal financial statements at all. However, preparing an income statement is good advice even for small businesses as it opens doors to financial growth and other benefits.
What to do with your income statement
P&L, or the income statement, is the most scrutinized document your business has to prepare, but it’s worth the effort for a number of reasons:
- P&L is one of the crucial financial statements that provide you with a thorough understanding of the current financial standing of your business. It allows you not only to estimate your profits and losses but also to plan budgets and make future projections.
- P&L contains the 3 most important metrics in business for investors – gross profit, operating profit, and net profit. Investors turn to P&Ls for insights into the financial health of the business. They decide if your business is worth external investment based on the numbers and trends that they see on the statement.
- Healthy P&L secures the loans small business owners might need for growth and development. If you need to apply for funding or loans, creditors often require an income statement as part of the application process.
- P&Ls are used by the government for tax purposes. They’re required in order to estimate how much your company has to pay in revenue taxes.
Types of profit and loss statements
There are two ways a business may use to prepare profit and loss statements – using the cash or accrual accounting method. Let’s break them down.
Cash method for calculation of profit and loss
The cash method of accounting is a one-entry method that’s a good choice if you’re running a small business or if you’re an individual in need of managing your personal finances. This approach is used to account for cash that goes in and out of the business, which means that you take into consideration only the cash received or paid. When cash is received, it’s recorded as revenue, while when you pay bills, these transactions come out as liabilities.
Accrual method for calculation of profit and loss
A more sophisticated method of accounting is accrual accounting which is a double-entry method. Under this method, you record revenue as it’s earned, which means that your business accounts for money that is expected to be received in the future. Whenever you sell a product or service, you instantly record this transaction as revenue on your P&L statement, even though the payment will take time to be received. Likewise, liabilities should be recorded as expenses.
Profit and loss statement template: which one is the best?
Under GAAP, there’s no universal template for a P&L statement. However, lots of websites and even governmental authorities provide a variety of templates which typically include income or revenue, expenses, total expenses, and net income. These categories are conventionally divided into the top line and bottom line sections or entries:
- Top line: All the income statements begin with the top line which is an entry for the total revenue or income generated by a business through its primary operations.
- Bottom line: The last line of your profit and loss is extremely important and is commonly referred to as the bottom line (also known as net income or net profit). The net income is also referred to as earnings or profit and represents the amount of profit a business has left after deducting all of its expenses.
NB. It’s essential to understand the difference between revenue and net profit. Though the terms may sometimes be used interchangeably, the concepts differ critically. While high revenue is undoubtedly a sign of success at the moment, it’s not the only metric that matters. It’s profit that indicates how sustainable your business is in the long term. In the case of net loss, gross profit value is negative.
Knowing what top and bottom lines are and following a suggested template make calculating your profit and loss statement simpler. However, you should know exactly how the whole process works. Creating P&L and other accounting financial statements involves keeping track of your numbers, paying attention to the slightest detail, and allowing time for corrections. If it doesn’t feel like something you’d like to devote a significant part of your resources to and on top of that, you want to have some kind of insurance against inevitable discrepancies, automated software is here to help.
Let us view and explore how the calculation of the statement with the help of automation tools works, and what benefits it can bring to business management.
Profit and loss statement with Synder: an automated income statement
Synder is a comprehensive and easy-to-use e-commerce accounting solution that automates a significant part of your accounting and helps you get rid of manual work. It solves multiple problems: captures detailed data from all your connected payment platforms (Stripe, PayPal, Square, etc.) marketplaces (eBay, Etsy, Amazon, Shopify, etc.), and accounting software (QuickBooks Online, Xero, QuickBooks Desktop, or Synder Books) and then categorizes it, facilitates reconciliation, and creates flawless financial reports.
By using the data from all your sales channels, payment gateways, and accounting software, Synder provides you with the most detailed information on your P&L statement. With the help of Synder’s rules and settings, you can categorize transactional data in your accounting system in a way that suits your business.
As it’s already been noted, a P&L statement is a source of information about the profitability or losses of a given business that summarizes its total income and expenses at a specific time. What it means is that all of your income and expense transactions (invoices, sales receipts, bills, checks, etc.) recorded in your accounting software will be included in this report. Naturally, in order to create an income statement, you or your CPA need to start by stating the revenue, proceed with accounting for incurred expenses, and finally state the net income which indicates the company’s profit or loss.
With Synder’s automation, the starting point, of course, is choosing the period for calculation. You can prepare P&L statements for various periods: this month to date, last month, this year to date, or you can choose a custom interval (this Monday or last ten days, for example).
Create an accurate and detailed P&L statement to track your business’s progress – generate a P&L report with Synder.
Columns in the statement may be displayed by:
- e-commerce stores;
- payment processor;
The filters give you an opportunity to use the most detailed info to your advantage. Now you’ll have a clear understanding of which client, product, class, and payment platform is bringing you more revenue and which aspects of your business are slowing you down.
Your profit and loss report displayed by period (the most frequently chosen option) might look like this:
And now, let’s break down the process of creating an accurate and detailed P&L statement in Synder and have a closer look at the steps that Synder makes for you while you spend your time on other things that matter.
1. Calculating revenue or total income
Tracking the income or the funds you’ve received in payment for goods and services over the accounting period gives you your total operating revenue. Synder calculates everything your business has earned, including the payments collected for the non-operating activities, and displays the number under the ‘Total Income’.
2. Calculating cost of goods sold
Synder gathers the details on the cost of goods and services – any expenses associated with manufacturing, selling, and shipping a product, sums everything up and puts them under ‘Total Cost of Goods Sold’.
3. Determining gross profit
Now that Synder knows your total income and COGS, it subtracts the COGS to determine your gross profit or gross margin – the profit you’ve earned from selling your goods and services.
4. Calculating operating expenses
The next thing is calculating all of your operating expenses – the costs spent on running your business (administrative, general, or selling): fees, rent, utilities, payroll, maintenance, etc. Synder labels the total number as ‘Total Expenses’. For example, if you’re running a SaaS company, your expected costs typically include salaries, web hosting fees, software subscriptions, hardware repairs, equipment purchases, and transport and advertising fees.
Check out how Synder can streamline SaaS business management.
5. Obtaining net operating income
After subtracting operating expenses from your gross profit, Synder gets the total operating profit (or loss) of your business, also known as net operating income – the total amount you make before taxes, depreciation, interest, and authorization. The operating profit is labeled as ‘Net Operating Income’ on the statement.
6. Calculating other expenses
If your business has an additional income or expenses not related to its primary activities, you’ll want to adjust for them. Interest and dividends from investments, interest paid on loans – they all fall into this category. Synder calculates interest, taxes, depreciation, and amortization expenses, sums them up, and displays the total amount under ‘Total Other Expenses’.
7. Obtaining net income
Finally, Synder subtracts the total expenses from your gross profit and arrives at your net profit which is labeled as ‘Net Income’. Now you know if you have profit or loss after deducting all the expenses.
As you can see, Synder takes a very precise and detailed approach to get your P&L statement ready and makes sure that everything is as smooth as possible.
Business insights – bonus step
Apart from impeccable reporting, the solution also provides you with data for business insights. Now you have unlimited access to consolidated reports not only on metrics like COGS or gross profit margins but also on customer behavior, product performance, and many more, which allow you to make informed and timely decisions.
To see this accounting solution in action – book office hours with our best specialists. Learn about Synder’s general flow and bonus features, ask questions, and dispel your doubts. Sign up to activate your 15-day free trial (no credit card needed) to explore everything yourself. Simplify your reporting and get actionable insights with Synder!
Closing thoughts on profit and loss
There are many financial statements that should be regularly prepared by a business, and one of the most important ones is a profit and loss statement. P&L allows you to manage the money that goes in and out of your business and gives you a clear understanding of how much you’re making or losing and why. It also allows you to look into the future with more confidence.
Required by business owners, investors, creditors, and governmental authorities, P&Ls call for special attention when prepared. While calculating might seem easy, the process is time-consuming and usually requires additional resources. Automation is the best way to streamline the process and ensure the quality of your final financial statements, so make your life and the life of your CPA easier – implement Synder to have total control and access to the most detailed and precise info at any time.