How to Figure Profit and Loss

Profit and Loss Statement

When you operate a business, you have money coming in from sales. This money is your gross profit or revenue. As you operate your business, you also have money going out for expenses. Your expenses are divided up into direct expenses and indirect expenses that include overhead. The direct expenses include things like materials, products purchased for resale, feed, and salaries to employees, as well as other employment related expenses. The indirect expenses include your building rent or depreciation, electricity, heat, office expenses, machine and equipment depreciation. You will need the totals of these numbers to calculate your profit and loss for a given period.

Things You'll Need

• A pen or pencil
• Ledger paper
• An adding machine or calculator
• Access to income and expense information
• Knowledge of the type of business
• Optional equipment
• A computer
• Accounting software
• A printer

Instructions

1. Decide on the reporting period for which you desire to calculate a profit and loss. If the reporting period is one month, three months, or a year only add the income for those actual days. Income comes from producing goods, rendering services, other business activities, and the disposition of assets added together.

2. Add up all of the money that has come in for the reporting period. Then you subtract sales returns, discounts, and allowances from the income. This final number is your gross income or gross profit.

3. Add up all of the expenses incurred in running the business and selling the goods for the reporting period. Add up the expenses from the same days to that you used to figure the income. Examples of expenses include cost of good, materials, advertising, marketing, salaries, supplies, utilities, depreciation, insurance, and repairs and maintenance.

4. Subtract total expenses from gross income. If your revenue or gross income exceeds your expenses then you made a profit. If your expenses are more than your revenue then you had a loss. To simplify this further, if the answer to your subtraction problem is a positive number you made a profit. If the answer is a negative number, you incurred a loss for the reporting period.

Tips & Warnings

• Profit and loss is much easier to keep track of if you use a computerized accounting program.

• Microsoft office offers free templates you can download from their website as well.

• Some popular computerized accounting programs are Quick Books and Peachtree for small companies, JD Edwards for large corporations.

• Companies are subject to audits. Misappropriating funds by juggling the books or embezzlement are felonies.

• Limitations of a profit and loss statement, or income statement are listed below.

• Brand recognition and loyalty may be relevant but cannot be measured reliably.

• The accounting methods used will affect the final numbers.

• Some numbers used, such as depreciation, depend on judgments and estimates of useful life and salvage value.

Resources

• Wikipedia Profit and loss
• Microsoft Templates