From invoices to quarterly taxes, self-employed individuals have a lot of paperwork to stay on top of. While there's no legal requirement stating you must file a profit and loss statement with any regulatory agency, you should still consider compiling one so you know exactly what's happening with your small business's finances. This attention to detail now can mean the difference between business success and failure in the long run.
Definition of a Profit and Loss Statement
A profit and loss (P&L) statement, which may also be called an income statement or income and expense statement, allows a business owner to see in one quick view how much money they are bringing in and spending—and how. A profit and loss statement is different from a banking statement in that you are keeping track of all funds that flow through your business, not just bank transactions.
To that end, the two main features of a profit and loss statement for a small business are income and expenses. When listing these two items, you should think as broadly and comprehensively as possible. Whether or not items have income tax consequences—that is, regardless of whether you have to claim items as income or can deduct them as legitimate business expenses—you should include them on your profit and loss statement to ensure you're getting the fullest possible picture of your business's finances.
Setting Up a Profit and Loss Statement
The simplest way to set up a profit and loss statement is by using your favorite spreadsheet program, such as Excel or Google Docs, although this type of report comes as built-in functionality in a lot of accounting software. Most business owners choose to create a monthly statement so that they can see each period individually as well as the year at a glance, which is done by simply totaling the rows. The time frames should run across the top of the spreadsheet.
On the side rows, in addition to those for income and expenses, you should have a row for your net income, i.e., your income minus your expenses. On the far right, you can total all the rows so that you can quickly check your business's financial progress on a monthly and/or yearly basis.
Note that for maximum benefit, you probably want to break down your income and expense rows into individual items, like book purchases for research and your internet connection. If you get paid from several different sources, you can also itemize those, making it easier to monitor increases and decreases from various clients.
Monthly maintenance of the profit and loss statement can ensure you're getting the maximum benefit from this important business document. But remember that your profit and loss statement is not a static document: you can always adjust it to fit your business's needs and it can grow along with your enterprise.
A profit and loss statement for self-employed individuals can be a critical part of staying on top of financial transactions throughout the year and can provide a methodical way for you to monitor your business's ups and downs. Although you can choose to handle this responsibility yourself, an online service provider can provide an added layer of confidence that your business is in the best financial shape possible.