Easy Steps to Create a Profit & Loss (Income) Statement

In general, everyone who owns a business would want to make profits. In order to find out how much you earn, you need to make a profit and loss statement. A profit and loss statement which is also known as an income statement is a summary of the income and expenses incurred by a company over a certain period.

The income statement is created to compare the expenses to the profits earned by a company and to find out how effective the business development strategy has been done by the company is. If you have a large business, then perhaps creating an income statement is no longer a difficult task to you. However, if you are just starting a business and only have a few employees, it is very important for you to know the steps to create an income statement.

Income Statement-Related Terms You Should Know

Well, before learning the steps to create an income statement, you should first know some important terms that are most often encountered in the income statement.

1. Revenue

Revenue is the value of the sale of goods or services that the company has earned during a specific period

2. Cost of Goods Sold

COGS is the total cost of the goods sold plus the shipping costs of the goods from suppliers to your place.

3. Expense

An expense is the cost incurred to run your business, such as call charges, electricity, salaries, promotions, and more.

4. Gross Profit

Gross Profit is the difference between net sales and cost of goods sold.

5. Net Income

Net Income is the total earnings minus cost of goods sold, expenses and taxes for an accounting period.

6. Operating Income

Operating Income which is also called Earnings Before Interest and Taxes (EBIT) is a measurement of profit minus costs associated with your company’s operations.

7. Pretax Earnings

Pretax Earnings (or Pretax Income) are a company’s total earnings before income taxes have been subtracted.

8. Income Tax

An Income Tax is a tax pressed on individuals or entities that varies with respective income or profits.

9. Dividend

A Dividend is a share of a company’s profits to its shareholders based on the number and class of shares held by them.

10. Retained Earnings

Retained Earnings are the percentage of net earnings not given to shareholders as dividends.

How to Create an Income Statement

1. Create a Transaction Journal

The first step you should take is to record all your business transactions. This transaction journal involves your entire income and expenses. Your income includes the proceeds from the sale of your goods or services, while the expenses cover all costs you incur in the interest of your business including operational costs, such as the costs of occupancy, office inventory, marketing, employee salaries and more.

You can also include earnings that are not directly related to the operations of your business, such as income from interest, dividends, miscellaneous sales, rents, royalties and gains from the sale of capital assets. And, after the transaction journal has been created, you can copy the entire transaction records to a ledger.

2. Create a Trial Balance & Adjusting Journal Entries

The next step to do is to make a trial balance. A trial balance is an internal report run at the end of an accounting period, listing the ending balance in each account. It is mainly used to ensure that the total of all debits equals the total of all credits, which means that there are no unbalanced journal entries in the accounting system. An imbalance between the amount of credits and debits usually occurs due to an error in account placement in the making of a transaction journal.

If there is a difference in the amount of credits and debits, then you need to make some adjusting journal entries. They’re usually made in your accounting journals at the end of an accounting period after a trial balance is prepared. The purpose of adjusting entries is to adjust income and expenses to the accounting period in which they occurred. Once the entries are made, then you can re-create a trial balance by referring to those entries.

3. Create an Income Statement

The final step to take is to prepare your income statement. But, the first thing you need to know is the format of the income statement and its components. You need to create a spreadsheet consisting of your company’s identity, the title of your income statement as well as its period, and three critical components that include your total revenue, total cost, and profits and losses.

Total revenue and total cost can be copied from the trial balance you have made, while the profit and loss component is calculated from the deviation between total revenue and total cost. If the total amount of revenue is greater than the total cost, it means that your business has generated profits. However, if the total cost amount is greater than the total revenue, then your business has incurred losses.

Well, it turns out making an income statement is not too difficult, is it? In summary, the income statement can be made based on the calculation of income and expenses. The deviation between the two is what determines whether your business is making profits or operating at a loss.

If you want to streamline your business and simplify accounting management in your business, then maybe you need to consider the implementation of an Accounting Management Software. HashMicro provides a fully-featured and integrated Accounting Management Software that can be tailored to your business needs.