What Is a Profit Sheet?
A profit sheet, often referred to as a profit and loss statement or income statement, provides insight into the financial performance of a business. Profit and loss statements provide businesses of all sizes with a way to visualize income and expenses across a period of time, such as monthly, quarterly and annually.
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Gross Profit
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Entries related to the calculation of gross profit are included at the beginning of the profit and loss statement. Calculating gross profit involves adding up all income received from sales, known as gross sales, and deducting the cost of goods. The cost of goods sold includes all production-related expenses, such as inventory and the expense related to the labor required for production. Gross profit represents the overall profits of the company before the deduction of fixed and discretionary expenses and taxes.
Fixed Expenses
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Once gross profit is calculated, operating profit is calculated on the profit and loss statement. Operating profit represents the amount of profit remaining after fixed and variable expenses are deducted from gross profit. Expenses commonly deducted to calculate operating profit include expenses related to selling the product or service and expenses related to administration and employee wages and salaries. This includes expenses such as travel, utilities, rent, postage and advertising.
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Other Expenses
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A host of discretionary expenses also need to be taken into account on the profit and loss statement. Types of discretionary expenses include depreciation, interest expense and salaries paid to company officers. Rent can also be listed as a discretionary expense if the owners of the company own the building and charge the business rent for use of the building. These expenses are deducted from operating profit, resulting in earnings before tax, also referred to as net profit before taxes.
Considerations
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Businesses also have to take into account another expense -- taxes. The deduction of taxes will result in the net profit, or loss of a business. Over time, businesses can use the profit and loss statement to help identify trends and abnormalities related to expenses. The profit and loss statement can also provide lenders with important information related to a company's ability to take on more debt.
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