The Profit and Loss made simple – Part 1 – Simple facts
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 reports the activity in sales, expenditure and profitability over a specified period of time.
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.
To help you understand the financial activities of your business, here is a step by step breakdown of how to read and understand the profit and loss.
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 will also explain how the profit is calculated by walking you through the simple calculations that happen when the P&L is reported.
Just one important point before I begin. You cannot tell from your profit and loss how much cash you have. Profit does not equal cash period, dont ever make this dangerous assumption. The amount of cash resulting from financial activities is to be found 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.What has been sold (the sales transactions) are always stated in your Income accounts.
So if you’re reporting by month and in March you invoiced or sold 1,000 worth of Products or Services. Then this line will show a 1,000 pounds for the month of March.
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
