Businesses are the main backbone for the economics of a country, the size does not matter in it, even small businesses play an important role in the financial position of a country, and these commercial bodies maintain a good accounting environment by using systematic and well-organized financial statements.
Profit and loss statement is the foremost financial statement used mainly by small businesses. The profit and loss statement is one of the basic financial statements used by every type of business.
What is a small business?
Small businesses are the small companies and trading houses which are on the initial stage of becoming Commercial giant, they are the aspiring Working entities who are working hard to grow and get profit in the market, it can be of small or even of midget size but as we all know that every big thing starts from a small beginning, so as with business this type of businesses have to work in a very efficient manner to increase the profits and deduct the losses, there is a huge need of proper management and calculations of accounts for this.
We can see the example of a profit and loss statement for a small business.
What is the profit and loss statement?
The profit and loss statement, also known as the P and L statement, is a method of calculating income and expenditure occurred in the business by which we can find the loss or profit in the business. This statement is also known as the income statement. P and L statements can be done monthly, quarterly, annually or at any defined period.
Accounts are very much important in a business, a good business needs to have a right estimation of the amount of trade, there are many type of statements which can help in figuring out the gains and losses in small business, we can take the example of Profit and loss statement for small business, it is one of the best way to calculate our accounts.
By this statement we can find out that how much is the income incurred in our business and also what all expenses have occurred in return of that income, it shows us the present potential of the business, on basis of which, we will make our decision of changing or framing some new policies in our business, it helps us to know the right period of expanding our business.
Balance sheet vs P and L statement
Balance sheet is one of the main financial statements for a business where a legally accurate balance sheet is always balanced.
It is called the balance sheet because the assets and liabilities, shareholder’s equity is always some in this financial statement.
The profit and loss statement is a more simple and visible financial statement compared to the balance sheet. The balance sheet is mainly used by medium and large range of organizations, the small businesses mainly prefer profit and loss statements.
What does a profit and loss statement contain?
The profit and loss statement mainly consists of three parts, I. E., expenses, net profit/loss.
Incomes is the first separate table in a p and l statement which contains all types of incomes and revenues which we get through the business in the present period of the statement.
The income section contains:
- Other types of income
Expenses is the second separate table in p and l statements where you can find all types of direct and indirect expenses occurred in a business in the defined period of the statement.
The expense section contains:
- The bank charges
- The cost of goods sold
- Other expenses
3. Net Profit/Loss
Net Profit/loss is the third and last separate table in the p and l statement, it is the estimated result which is derived from the subtraction of other two separate parts of the statement.
By this part we can know whether our business is in profit or loss.
Most of the small business owners give the example of a profit and loss statement for small businesses to use because it is a very easy and simple way of knowing the profit and loss in the business.
How to create a profit and loss statement
The profit and loss statement can be created by using two ways, manually.
1. By Software
We are in a great the 21st century where everything is automated and is done by just one click. Now, the same modern approach is used in the world of accounts and calculations where you can easily calculate and figure out the required estimation by simple and easy to use software, this software reduces the time and gives the rapid output, this software provide us accurate results which is very essential in business, they are the reliable source of creating a profit and loss statement, it will cut the labor costs for calculation and will help in growth of the company which is a very big necessity in the initial stages of a small business.
We can even create a profit and loss statement manually. Typically, most of the small businesses are still using this method of creating a P and L account; this requires patience and good calculating skills for creating a P and L statement manually.
The procedure to create a p and l statement manually is :
- Create a table consisting of three separate parts.
- The first part should contain all the direct and indirect incomes of the business for the given period.
- The second part should contain all direct and indirect expenses of the business for the given period.
- The third part will contain the output of subtracting the above two separate tables, we can know whether the business is in profit or loss by this part.
Example of profit and loss statement for small business
A book selling business named knowledge books store has an income of $250000 and expenses of $200000 for the year 2019-2020.
(This contains all types of direct and indirect incomes and also direct and indirect expenses)
So the net profit is $50000 ($250000-$200000)
This shows that the book store was in profit for the year 2019-2020.
Profit and loss statement is the most trusted and widely used financial statement of the world, it’s a must to have for every type of business, as it gives us the basic idea which help us to know the financial position of the business and help us in speculating the future of the organization, by which the private players opt to take the risks in market.