A profit and loss statement (P&L or P/L) is a vital document for your business. It is simply a list of your total gross income and expenses. There is no true ‘format’ for a P&L, because each business is different than the next, even within the same industry. The P&L may look a little different than your bookkeeping, or accounting numbers for those who use an accrual method of accounting. For our purposes however, we are going to be discussing a cash method of accounting – rather, you count your income when you actually receive it, and you count your expenses when they are actually paid (just like your bank account).
Income and Expenses Categories
One of the important things a business will do, and often improve as time goes by, is keeping track of the various monies in and out of the business. Whether this is done on paper, use of a program, or by hiring someone to do the accounting work, is immaterial. Income is normally lumped together, but can have its various sources which you would group together. A hair salon may track its haircut income as one sub-category of income, and the retail sales of hair products as another sub-category (could be important for state sales tax purposes).
Expenses is where most of the work lies, as business owners should work with their tax professional (this often takes several years to get it right) on what categories their expenses should be separated into. Each business and industry is different and will have their own unique expenses. Things that can be quite common would be office supplies, advertising, and business miles driven. Never be afraid to make an additional category for something that doesn’t fit the categories you had before.
Creating the P&L
Now that you have recorded the categories of income and expenses, you are ready to make your P&L. Simply total the amounts of each category for the calendar year (Jan 1, to Dec 31) starting with income. The P&L is just the annual sums of each category of your income and expenses.
The challenge that most small businesses have, is waiting until the end of the year to try and do all of this work. ‘Wait, I need to go through ALL my receipts, categorize them, and then add them up? That’s going to take 3 days!’ As with many things in all our lives, constant upkeep is significantly better than one big job. Think of your dishes in the sink. When you let them build up for 2 days or so, the task just looks daunting, so you might procrastinate a little longer because you’re not willing to commit 2 hours to dishes right now. Then the job gets bigger the next time. The same thing happens with your business records. If you don’t regularly work on it, the task gets bigger and bigger, and it gets easier and easier to be too busy or too tired to complete it.
The work behind creating a P&L is helpful for reasons beyond tax preparation as well. Regular monitoring of your income and expenses is very valuable knowledge. Over the years you can see trends. Which months are high income, which months are low income. You can plan marketing or vacations around that. If you decide to use software, you can start to run reports that give you data from different viewpoints and help you find things that will help your business increase profit (a decrease in expenses, or increase in revenue both help in that regard).
If you were to visit https://molentax.com/resources/ you would find a few items we call ‘checklists’. While we have a high level of expertise working with law enforcement and real estate, we have also included a ‘general’ checklist as well. This is an example of something close to a P&L that can help you get started. You will notice there are categories, and items within each category. While this works, it is a lot of information to look at. If we were to pretend that these few categories captured all expenses for your business, then your P&L would be list something like this:
Total Income: $$
Legal and Professional: $$
Office Expense: $$
General Supplies: $$
Year end: (here is the profit or loss number of your total income less your total expenses).
This is only a general overview of a P&L. It can be this simple for some and require more detail for others. Please consult with your tax professional or accountant/bookkeeper for assistance regarding your particular business or industry.
Senior Tax Professional