Profit And Loss Statements: Learn The 10 Components How Prepare Your Own Income Statement 

By: David T. Moore|LRL Writer  

In a small business venture one needs to ask a few questions regarding profit and loss to understand the viability of the business. The way in which the products and services are affecting the market and the total income being made are two important issues which needs to be dealt with adequately. Keeping track with the business profit and loss (P & L) or income statement reports on regular basis can help business owners and their stockholders stay on top knowing about the increase and decrease of the company's gross revenues and assets. Another importance of having profit and loss statement is that it will show a company's financial progress during the time period being analyzed, in comparison within the following years of business.

The 10 Components Of Profit And Loss Statements:

1. The data needed in order to create a P & L statements:

Net sales - the total sales during the time period being examined minus any allowances for returns and trade discounts.

Cost of goods sold, also known as cost of sales - it is the total price paid for the products sold during the accounting period. This is only just the price of the goods.

Selling and administrative expenses - selling expenses include direct and indirect sales, such as; sales representative salaries, sales office costs, commissions, advertising, warehousing and shipping. General and administrative expenses are usually considered "overhead" expenses, which includes rent/lease, insurance, utilities, telephone, travel and supplies.

Other income and other expense - these are items for any uncommon expense or income items that are indirectly unrelated to the day-to-day business operations. Other Income includes from interest, dividends, miscellaneous sales, rents, royalties and gains from the sale of assets. Other expenses are any unexpected losses unrelated to the normal course of business. It could be a loss from the disposal of some office equipment.

2. Elements of income: This is divided into four main categories; expenses, revenues, gains and losses.

3. Income determination: Income is determined by the difference between resource inflows (revenues and gains) and resource outflows (expenses and losses). Expense and loss recognition are divided into categories like direct matching, systematic rational allocation and immediate recognition. Expenses should be related to specific revenues. Assets that match more than one accounting period have to be taken into consideration. Some examples of immediate recognition include administrative costs like salaries, advertising, rent or lease expense, utilities, insurance, travel expenses and other office expenses.

4. Change in estimates: Judgments need to be made continuously to match expenses to generate current revenue. If the expense or revenue amounts change then the P & L statements are affected.

5. Pro Forma of the profit and loss statements: These statement reports are either single or multi-step. They include the revenue, costs and expenses, sales, operating expenses, administrative expenses and others.

A single-step income statement is usually sufficient for a small business. The first line includes the name of the business. The next line covers the income statement and the last line of the P & L statements are: other income, other expense and income taxes.

6. Cost of goods sold: Determination of the cost of goods is essential in merchandising or manufacturing. The cost of goods sold can be figured out by subtracting the last inventory from the cost of goods available for sale. But in a manufacturing business additional elements are included. It has three inventories- raw materials, goods being processed and the finished goods. In addition indirect costs are also included such as; labor costs, factory overhead, materials and supplies.

7. Operating expenses: This includes selling expenses, general and administrative expenses.

8. Other revenues/gains: Revenue from other financial activities and gain from assets are included in the profit and loss statements.

9. Other expenses/losses: Interests and losses from sales of assets are also accounted for as well.

10. Income tax on continuing operations: Income is computed from continuing operations and also for irregular or extraordinary items.

Profit and loss statements are very important for each and every business. Not only as a tool of comparison, these also help to locate problem areas in sales, margins and expenses, and provide methods of investigating problem areas in a reasonable amount of time. The P & L statements will give the business owner at one glance to review and make any type of adjustments where needed the most to the current business operations.

Click here to view sample profit and loss statement

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