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Profit and Loss statement or P&L is the financial statement that derives the financial stability of the business considering the revenue and expenditure over a span of time. The profit and loss statement shows whether the business is going on the right or wrong path and helps to retrospect the business operations, which gives inference whether to increase revenue, decrease costs or do both based on the net summary of the statement.Generate P&L for your business
For any business, making profits is the ultimate goal and that's what makes them stay in the business. In order to understand whether a business can sustain in the market and for future prediction, a profit and loss statement should be prepared.
A profit and loss statement consists of several components which affect the business, and each component includes varying amounts depending on the type of transaction.
Net sales/ Revenue is the total value of money that the company generates by selling its products or services adjusting from the returned goods value.
Cost of goods sold(COGS) is the direct cost incurred in producing a finished product from the purchase of raw materials for manufacturing sector or purchase of traded items in case of trading sector till the time it is ready for sale. Usually, the COGS is the total value of amount that is arrived at by the calculation of the below formula.
Cost of Goods Sold / COGS = Opening stock + Purchases + Direct expense - Closing stock
Gross profit/loss is the amount that the business makes out of selling its products or services, excluding the money spent on the cost of selling. This helps in easy identification of whether the selling price of the product can recover the basic procurement cost involved with sufficient margin.
Direct expenses are expenses other than purchase costs that are directly incurred for the core business operations of the business. As the name suggests, it directly relates to the cost of production or acquisition of the product. Some of the examples are freight inwards (freight on purchases), loading & unloading charges, factory wages, factory rent, etc.
Indirect expenses are essential costs that are indirectly involved in the smooth operation of the business. Some of the expenses are administrative salaries, office rent, depreciation, office stationers/maintenance, insurance, advertisement, salesman commission, and much more.
Net profit is the actual profit or loss that a business made over a financial period adjusting the indirect expenses and indirect income from the gross profit. This actually helps in easier identification of whether the business can generate returns from the investment made and detect where the business lags in generating profits.
The profit and loss statement is categorized into two different formats. Depending on the need and mode of analysis, each business chooses its preferred mode of format.
The Vertical format profit and loss statement is different from the Horizontal format, which is simple to arrive at using the data from trial balance. The vertical format of P&L in which the analysis flows from top to bottom, by aggregating the income and expenditure ledger balances from trial balance to find the net profit/loss for the specified period.
All companies should necessarily use vertical format as per Schedule III of Companies Act, 2013.
A Horizontal format profit and loss statement considers the differentiation of direct vs. indirect income and expense made for a period in which the analysis flows from left to right in a horizontal manner with expense ledgers on the left side and income ledgers on the right side. Usually, for horizontal P&L format, "T-shaped structure" is followed. The first/upper section of the P&L horizontal format represents trading account transactions, while the second/bottom section represents the indirect transactions for the period. Traditionally, non-companies prefer this format for their P&L analysis.
Preparing a profit and loss statement needs basic skills of excel to simplify the calculation and get accurate results. The steps that are to be followed to prepare a P&L statement in Excel are as follows:
Creating P&L is as easy as generating invoices for your customer based on their purchases. This single step method opens up your eye to transform from multi-step, time-consuming operation and helps you understand your business better.
Open the integrated accounting application "AccountsEasy" and navigate to the reports menu. Select "Financial statements" and then "Trading Profit & Loss" report. The wait is over. You can now see the profit and loss statement for the selected period. The transaction that happened in the ERP will be automatically updated.
In this profit and loss statement example, we could see it is divided into 2 sections - Trading account in the first half and the P&L account in the second half. The trading account starts with the opening stock entry on the debit side. After which the net purchase and other freight charges incurred in the procurement of raw materials are adjusted. Similarly, on the credit side, the net sales are adjusted with the closing stock value. Now by comparing the credit and debit sides, the gross profit/loss can be found.
After which the gross profit/loss can be brought down to the P&L account. If the trading account ends with gross profit, it will be brought down to the credit side, similarly if its gross loss, it will be brought down to the debit side. After which the indirect incomes and expenditures are adjusted respectively on the debit and credit side. Then the net profit/loss arrives similar to how we found the gross profit/loss.
There are a variety of financial statements that cater to different needs of a business in all aspects. The retail income statement, also known as retail profit and loss statement, is a financial statement that flourishes the below benefits for the business
Helps businesses to track whether they are progressing on the right path, making the expected profit from the business
Helps in comparing the performance with the previous year's statements to identify the growth rate
Infers where to reduce the expense, where the money gets blocked and how to increase the net profit
Facilitates the interpretation of business performance and the taking of informed decisions at any time
Calculates the operational efficiency of the business
Determines the ability to generate revenue for a longer term
The major purpose of profit and loss statement is to analyze a company's income and expenditure over a financial year or any specified period. A profit and loss statement is one of the major financial statements required in a business.
The Balance sheet and P&L statement are the financial statements that solve the different purposes of the business needs. A balance sheet gives the data on status of the business in terms of assets and liabilities on any given date. Whereas, profit and loss statement infers exact details of expenses and income earned over a period. A balance sheet gives the current stand of the business whereas a profit and loss statement helps in comparing P&L statement for 2 different periods and understanding the growth curve.
Gofrugal's integrated accounting software helps the business to automate their GST and accounting calculations which in turn generates impactful business statements such as income statement, balance sheet and cash flow statement without the need for a individual manpower to generate this statement yet eliminating the manual error and provides accurate data. This makes the Gofrugal to be used by major businesses to manage their business end to end from purchase to final accounts and be the best for profit and loss statement generation.
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