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
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
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
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
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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