How to Do a Profit & Loss Paper

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A Profit & Loss Statement shows if a business is making a profit or loss.
A Profit & Loss Statement shows if a business is making a profit or loss. (Image: Jupiterimages/Photos.com/Getty Images)

A Profit & Loss Statement, also referred to as an Income Statement shows business owners if they are making a profit or loss in a specific time period. Profit and Loss statements can be created to reflect the net income for a day, a month, a quarter, a year, or any other time period. It is an important tool because businesses can use it to adjust their sales prices or strategies to optimize their profit, or can discontinue certain items that are not profitable. An income statement is also used for tax return preparation.

List all income during the specified period. This may include income from sales of goods or services provided, income from interest earned on bank accounts or investments, or any other business income source. Allocate one line per type of item sold, or group like items together. Make a heading "Revenues."

Write the name of each sale category. For example, for book sales you would start on the left and write "Children's Books" and on the same line to the right, enter the figure showing the total gross amount of income received from the sale of children's books in the reporting period. On the next line you would write "Gardening Books" and under the dollar amount show the total income derived from the sale of gardening books. Continue until all income items have been recorded. Do not include sales tax collected.

Create a line labeled "Total" at the bottom. Draw a line in the column under the figures. Add up all the sales figures and place the resulting number in the same column under the line. Leave a space and make a new heading, "Cost of Sales." List the sales items, one on each line as in the previous section. Write "Children's Books," and on the right, enter the total cost of the children's books sold. On the next line write "Gardening Books" and enter the costs for the gardening books sold. If you provide a service and no products, this section will most likely be empty.

Add the costs up and create a "Total Cost of Sales" line. Draw a line under the column of entries. Enter the total amount of the cost of the books sold directly under this column. On a new line write: "Gross Profit." Deduct the total cost of sales from the total revenues and enter the resulting amount. Draw a line above and below it.

Make a new heading, "Expenses." In this section you will itemize all your business expenses not directly related to the product you sell. This may include auto expenses, insurance expense, salaries and wages, office supplies, bank charges, and any other expenses incurred by the business. Do not include loan repayments or the cost of buildings, automobiles, office furniture or equipment.

Label a line "Total Expenses." Add all the expenses and write the total in the column under the expense amounts with lines drawn above and below it. Create a new line labeled: "Net Income" and deduct the total expenses from the gross profit. Write this amount under the Total Expenses with a line above and below it. This is your net profit (or loss) for the period you are reporting. If you ran at a loss, show negative amounts in parenthesis.

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