If you run a business or handle accounting for a company, it’s essential that you have a good grasp on where your organization stands financially. One of the most important tools for doing that is a profit and loss (p&l) sheet. By learning how to update and analyze your p&l sheet, you can better understand where your company is making money and where it’s losing it—and how you can tweak things to improve what you’re bringing in.
What is a Profit and Loss (P&L) Statement?
A p&l statement is a record of all of the money a company is bringing in and sending out. P&l statements are used to track a company’s income and expenses and to show how a company is earning and spending money over time. Profit and loss statements can be calculated over multiple time periods, including annually, quarterly, or monthly.
Calculating Profit and Loss: Cash vs. Accrual Basis
There are two ways to calculate profit or loss: cash basis or accrual basis. When you use calculate profit and loss based on cash, you simply recognize income as cash received or spent. Cash basis does not include accounts receivable or payable. Accrual basis calculates profit and loss including accounts receivable and payable, and it doesn’t necessarily wait for the actual exchange of cash.
Essential Items on a Profit and Loss Statement
If you want to understand how to analyze a profit and loss statement, it’s important that you know how interpret the following items.
Sales are the actual sales of items or services to customers. This item includes the money you receive for the sales.
Sources of Income or Sales
The sources of income or sales on your profit and loss sheet are the places that your money is coming from. This list accounts for all sources of revenue, including customers, investments, and more.
Some companies operate during one particular season (or do more business during one particular season). A profit and loss sheet can show that things change for a company financially, depending on what season it is.
Cost of Goods Sold
The cost of goods sold on a profit and loss statement show how much money you had to spend in order to sell the items you sold. This number will go up the more you sell, but it can help to understand how to minimize the number in order to maximize profit.
Net income is the amount of profit that is actually your company’s after all your expenses. Net income should be positive—that means you’re making money.
Net Income as a Percentage of Sales (also known a profit margin)
Your net income as a percentage of sales, or profit margin, is a percentage calculation that shows how much money actually came in from what you’re selling. To find it, divide your net income by your net revenue. Then, multiply that number by 100. Your profit margin should be going up over time—this shows the thing you’re actually trying to make money selling is making money for you.