October 20, 2022
One of the key documents in accountancy is the profit and loss statement. Together with the balance sheet, the profit and loss statement (P&L) gives a snapshot of a company’s bottom line at a particular moment in time. The P&L is one of the mandatory documents that any business must be able to present for any audit or reporting purpose.
In this article we’ll examine what a P&L statement is for, what it contains, and what it looks like. Let’s begin with the basics.
The P&L gives an accurate picture of a business’s revenue and expenses over a defined period – usually a month, quarter, or year. It lists revenue in two categories – operating and non-operating income. Operating income is the revenue from the company’s core business, and non-operating income describes any revenue from bank interest or investments.
It is called profit and loss simply because it can record either an overall profit (if revenue exceeds expenses) or a loss (if expenses total more than revenue in that period). It’s quite normal for P&L sheets to show losses at particular times of year, for instance if a large capital expenditure was required one month, such as the purchase of computer systems.
Losses are shown on a profit and loss statement in brackets i.e., ($2,300).
The P&L is a complimentary document to the balance sheet. A balance sheet must show how the total expenses and income of a company are balanced out, so that it remains viable (potentially with bank debt or other liabilities if an overall loss has been made). While a balance sheet totals all assets and liabilities, the P&L focuses on cash income and expenses.
A balance sheet would include the value of assets such as stock and machinery, whereas the profit and loss only includes the value of sales and other gains during a specific time period. Balance sheets are usually generated quarterly or annually, whereas a profit and loss statement can be generated month-on-month.
Here’s a simplified example generated by LiveFlow:
You can see that the upper portion of the P&L lists sources of revenue from the company’s main business (usually selling some sort of product). The document then goes on to subtract the various expenses that the company has, including salaries, office expenses, advertising, and the depreciation of plant, computers, or other capital assets.
Under “other operating costs”, you might include the personal expenses of sales staff and executives, such as travel, subsistence and expenses incurred from remote working.
Non-operating income includes any gains from bank interest or investments which don’t depend upon the company’s core business.
The P&L can be a summary topsheet, as in the example above, or can break revenue and expenses down in more detail, depending on what purpose it’s being generated for.
Another way to format a profit and loss is to show a progression over a lengthy time period, such as several years.
A school’s profit and loss statement would essentially be no different to that of any other business, except that revenue might include income from fees, bequests, fundraising and any federal or state funding. The expenses side would include salaries, supplies, the costs of examinations and more.
Here’s a sample of what a school P&L statement might look like [source: Pinterest]:
The biggest difference between a school’s profit and loss and a business’s is that as a publicly funded entity, the school has a nominal budget, to which the actual revenue and expenses are compared. In the example above, the second column shows the budgeted amounts and the third shows the variance between the budget and the actual P&L amounts.
This allows the school to demonstrate if it is running at an overall profit or loss in relation to its budget. In situations where an overall loss is shown, this can help to stimulate future fundraising efforts, request a budgetary increase, or justify an attempt to reduce costs.
LiveFlow has a set of templates for depicting budget variance within a profit and loss statement, making it easy to track performance against expectations on a periodic basis.
If you are already recording all your sales and expenses in a spreadsheet, most accountancy systems will allow you to generate a profit and loss statement very easily. Before you generate such a statement, however, it’s essential to ensure that all line items are included and accurate.
Here are the basic steps to follow:
1. Design the profit-loss template to include every possible line item, including those which have zero sums in the time period in question (you may need them for future reports).
2. Ensure that your accountancy system for recording income and expenses is up to date and accurate. Make sure that the dates when revenue was received, and when expenses were incurred are precise and truthful.
3. Use a system like LiveFlow to design the appearance and presentation of your profit and loss statement, then when it’s ready, generate and check it over before making the final iteration public.
A system such as LiveFlow can make generating both balance sheets and P&L statements extremely easy. Without requiring any additional manual data entry, Liveflow plugs straight into Quickbooks and allows you to create bespoke templates for profit and loss reporting, and numerous other accounting purposes, at the click of a keypad. Here are just some of the templates available. Also, you can customise or make the templates yours easily.
If you’d like a live demonstration of how Livelow can help you produce optimized, clear and accurate profit and loss statement, book a free demonstration.
Want to eliminate manual updates of your Excel & Google Sheets models?Yes, show me how