How to Figure Profit Retention on a Profit & Loss Statement

A profit and loss statement allows business owners to demonstrate business profitability and can be used to assist with tax filings.

A profit and loss statement affords business owners the ability to document the profit or loss from their business activity during a set period of time. If the business has been profitable then the statement allows the demonstration of profit retention. The profit and loss statement also provides a tool which business owners can use to help complete the Internal Revenue Service's Schedule C tax form.

Instructions

1. Calculate the net product sales. This is the amount which you collected from product sales. For example, if you sold 1,000 widgets at a sell price of $10.00 per unit, then your net sales would be $10,000.

2. Create a tally of your direct product-related costs or costs of goods sold. See how much it cost you to purchase or create the 1,000 widgets from the above example. Don't forget to add in the cost of any inventory which you had at the beginning of the reporting period and subtract inventory which you will be carrying forward to the next profit and loss reporting period.

3. Total your indirect costs. This includes all of the costs which were indirectly incurred as a result of your business activity. Examples of indirect costs are your salary, insurance, travel, advertising, dues, subscriptions, printing, postage, utility bills, equipment depreciation, rent, license fees and taxes.

   These costs can be classified as either controllable expenses or fixed expenses. Controllable expenses include costs which you can control and which vary based on sales volume such as advertising or salaries. Fixed expenses consist of items which cannot be as easily reduced such as utilities and rent.

4. Subtract your direct (cost of goods sold) and indirect costs from the net sales. Hopefully, your business is making a profit and this is a positive number. This figure represents the profit retention.

Tips & Warnings

• The template for your profit and loss statement may include additional methods to break down the direct and indirect cost. For example, the taxes may be figured separately from the other indirect cost. (See Reference 3 - P&L Template)

• The profit and loss statement is also sometimes referred to as an income statement. (See Reference 4)

References

• Internal Revenue Service; Schedule C
• Edward Lowe Foundation: How To Prepare A Profit And Loss (income) Statement
• Microsoft Office: Excel 2003 P&L Templete
• Ohio State University: The Profit and Loss Statement: What Does It Mean?
• Knoxville Chapter of Score: Profit and Loss Statement