How the Profit and Loss or Income Statement works - Part 1 - How is it used
If you are running a small business or using small business accounting software it’s vital that you master reading and understanding your profit and loss statement. And if you are stuck You will find videos on Youtube in the Small Business Heroes channel to help you understand this report or statement.
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.
Here is a very simple overview of how to read the profit and loss report and understand the financial activity.
Here I share with you how the profit and loss is generally presented in reports created by small business accounting software
I will also discuss the mathematics used in the profit and loss to express the bottom line or how much profit the business is 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. The generation of profit doesnt directly equate to the generation of cash. The cash available for use by your business is 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.The Income accounts contain a detailed history of the products and services 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 in 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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