A Profit & Loss (P&L) Statement or Income Statement is a financial report that shows your Income minus your Expenses. All of the income you received, minus all the money you spent, which equals your net profit or loss.
This statement is all about showing your business' performance over time. Essentially, it tells you if your business is doing its job right!
At E & S Group we prepare monthly P&L Statements for our clients. This may seem tedious and unnecessary during the early stages when you have less money moving around, but you'll be grateful for the detail as the time passes! Plus it will line up super nicely with your bank statements, which makes the entire bookkeeping process more streamlined.
Step 1. Transactions
You're going to need to compile your data for whatever time frame you're working with.
Do you have a separate checking account for your business? Your job will be made much easier if you do. All you need is to open your online banking and/or grab your last month's bank statement.
If you don't have a separate account, do so ASAP!
This is pretty simple if you don't have many transactions, but if there's a lot, you may want to grab a highlighter, print your statement, and start highlighting! If it had anything to do with your business, it counts! If you're not sure, highlight it anyway and address it later.
If you purchased anything business related with cash, (cute office supplies from Home Goods, perhaps?), either find the receipts or write down your best guess for the amounts. Estimates are not ideal, but they're better than ignoring the transaction altogether!
Step 2. Revenue
Your revenue is any money your business earned. Not money that you put in.
If you transferred money to your business' bank account, that's not income.
If you paid for a business expense with cash from your wallet, that's not income.
If you got a refund on something you paid for, even if it was for business, that's not income (that'll simply reduce the expense account where you would have originally categorized the money going out).
If you generated an affiliate sale, it isn't income on your books until the cash hits your bank account. A lot of affiliate sales don't go through, and a lot of affiliate programs have 30+ day payouts. You'll count the income when it hits your bank, and no sooner!
If you'd like, you can create categories of income. I prefer this because it provides more information, and the purpose of accounting is to provide information! Here are some examples:
Once you've identified your income categories, find any income transactions among your bank deposits! Start recording and labeling using whatever system you're using: handwritten, Excel, or even bookkeeping software (I like Quickbooks! If you have a separate business bank account, you can even set up automatic downloads).
If you're already feeling overwhelmed or if learning how to use software sounds complicated, just start with a handwritten system for today or hire a bookkeeper. E& S Group offers custom tailored bookkeeping services based on your business size and needs.
For those of you with a separate bank account for your business, you've probably transferred money in (or out) of your business;s account at some point or another.
This money does not go anywhere on your Income Statement. Remember, an Income Statement shows you whether or not your business is making or loosing money.
Any item on your Income Statement should reflect your business doing what its in business to do - product sales, service sales, education sales etc.
You transferring money into your business to keep it afloat is unrelated to that performance level of activity. I will show you later how to record this money in your bookkeeping system, but for now, just keep track of it (not on your Profit &Loss Statement!).
Step 3. Expenses
The next step involves identifying your operating expenses. This means any money you spent for your business; not the money you took out for personal reasons or to pay yourself!
An expense is anything you paid for that is in some way supporting your business' operations;
This can be directly or indirectly tied to your operations. Here are some examples of common business-related purchases for bloggers:
Most of you naturally know that you record an expense transaction when the money was paid out. But if you didn't know, now you know: record the expense on the date that it left the bank. (And income when it shows up in your bank.)
If you write checks, you can use the check date (which gets used for more accurate reconciliations but don't worry about that just now). But how many of us are writing paper checks now days anyways.
Step 4. Reconcile
Make sure to reconcile your books! This can be done very easily in bookkeeping software But if you're using a handwritten system or Excel, it's still pretty easy.
Look at your bank statement for the month you're working with.
Write down the starting balance from the bank statement.
Put the bank statement down and look at your own records. Total up all of the income and any amounts you transferred in from your personal account.
Total up all of the expenses and any amounts you transferred out of the account.
Take the starting balance you wrote down and add the number you got in Step 3. Then subtract the number you got in Step 4.
This number should match the ending balance reported on your bank statement!
If it does match, congrats! You've accounted for all transactions in your bank account.
If it doesn't match, go back through and see if you missed any transactions or recorded the wrong amount. Also look for double-counted income or expenses; it happens!