Profit and Loss Form
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- February 7, 2020 Updated
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- What Is a Profit and Loss Form?
- What Are the Components of Profit and Loss Forms?
- Template Contents
- How to Use the Schedule C (Form 1040) Profit and Loss Form
- The Sections of This Profit and Loss Form
- Double Check Your Numbers
Tracking your company’s income and expenses on a profit and loss form can give you a realistic image of your company’s bottom line. It can help you better understand your cash flow, look for categories where you can reduce costs, and focus on categories of profit.
What Is a Profit and Loss Form?
There are several well-known names for this form. It’s known as a profit and loss statement, a P&L, or an income statement. Regardless of what you call it, a profit and loss form shows the financial state of a company over a set period of time. It summarizes the income and expenses of a business, and gives a clear summary of business finances.
What Are the Components of Profit and Loss Forms?
There isn’t a required profit and loss template that every company must use, so the components of profit and loss forms varies depending on a company’s needs. However, most profit and loss statements break down into certain categories. Often these forms include the following information:
- Gross receipts
- Gross income
- Cost of labor
- Returns and allowances
- Net profit (or loss)
- Cost of goods sold
This free Excel template contains a profit and loss form. It is modeled from the Department of the Treasury Internal Revenue Service (99) Profit or Loss Business (Sole Proprietorship) form. Once you download the form, you are ready to track your income and expenses. You will need to refer to other financial documents to complete this form. You will need your:
- Balance sheet,
- Tax return for last year, and
- Any other financial statements with income and expense data.
These forms will help you as you work through the template.
How to Use the Schedule C (Form 1040) Profit and Loss Form
The profit and loss form is simple to use. There are two different colors of cells. In the gray shaded cells, you enter numbers. The other cells have formulas in them so the numbers you need will automatically populate. Here’s an example. Notice on the left-hand picture that there are zeroes next to cost of goods sold (from line 42), gross profit, and gross income. But, after values have been added to the gray cells, those zeroes turn to the correct number, as the image on the right shows. As you continue entering your income and expense data, the white cells will update on their own. This reduces the amount of calculations you have to do manually and can decrease mathematical errors.
The Sections of This Profit and Loss Form
In this particular profit and loss form, there are five sections. They are:
- Cost of Goods Sold,
- Information on Your Vehicle, and
- Other Expenses.
Let’s look at each one so you know what is required.
Part I: Income
This section is where you record information about your business income. Though there are seven rows, you will only need to enter data in three of them:
- Gross receipts or sales
- Returns and allowances
- Other income, including federal and state gasoline or fuel tax credit or refund
The other values in this section are all automatically calculated for you. However, some of these cells are dependent on information from other sections of the form. So, they will not all fill in immediately. Please note that line six says to see instructions. You will find this direction on several different lines on this form. When you do, you can go to the official Form 1040 instructions to receive more information. You can access these in a PDF from the IRS website. There will be updated versions for each year, to help you accurately complete the form.
Part II: Expenses
Once you enter your income, it’s time to track your expenses. This section is for your business expenses. Expenses related to the business use of your home can be recorded on line 30. To help ensure you don’t miss any expenses, the form has them broken down thoroughly. You will find a line to record each of the following:
- Car and truck expenses
- Commissions and fees
- Contract labor
- Depreciation and section 179 expenses deduction
- Employee benefit program
- Insurance (other than health)
- Mortgage (paid to banks, etc.)
- Legal and professional services
- Office expenses
- Pension and profit-sharing plans
- Rent or lease
- Vehicles, machinery, and equipment
- Other business property
- Repairs and maintenance
- Supplies (not included in part III)
- Taxes and licenses
- Travel and meals
- Deductible meals
- Wages (less employment credits)
- Other expenses
- Reserved for future use
- Expenses for business use of your home
Not every business will have expenses in all of these categories. If one (or more) don’t apply to your situation, you can insert a zero. After you enter these numbers, the profit and loss template will calculate your total expenses. Then, it will calculate your net profit or loss by subtracting your income from expenses. Only allowable expenses should be entered. For instance, not all meals and entertainment are expenses that can be written off. Since tax laws change often, be sure to talk to a qualified professional if you have any questions about what is or isn’t allowed.
Using Your Home for Business
Some of your business expenses can be written off on taxes if you use your home for business. You enter this information in section two of the profit and loss form. Please note that if you are not using the simplified method of calculating the expenses for business use of your home, you will need to attach Form 8829 to detail your expenses. The simplified method is explained in detail in this article: Simplified Option for Home Office Deduction At the bottom of this section, there are instructions on what to do if you have a profit or a loss. You will need to enter your net profit or loss into your other tax forms, such as Schedule 1 Form 1040 and Schedule SE.
Part III: Cost of Goods Sold
In this section of the profit and loss form, you calculate the cost of goods sold. This is only for businesses that sell goods. If you are a service-based business, you won’t need to complete this section. If you sell goods, you will need to enter all the information. First, you will need to indicate the method you used to value your closing inventory. There are three choices: cost, lower of cost or market, and other.
Cost Method of Closing Inventory
The cost method of closing inventory is the most common. It uses actual costs you incurred for the purchase of raw materials plus the cost of labor to make your goods.
Lower of Cost or Market Method of Closing Inventory
Some companies place value on their inventory by looking at the value at its original cost and the market value at the end of the year. Whichever of these numbers is lower is the number reported to the IRS.
Other Method of Closing Inventory
If your business uses another method of closing inventory, it must be approved by the IRS. You will need to attach a statement that explains your method.
Remaining Cost of Goods Sold Section
Once you indicate which method you use, it’s time to enter your costs of goods sold. You will document your:
- Inventory at the beginning of the year,
- Purchases less cost of items withdrawn for personal use,
- Cost of labor,
- Materials and supplies,
- Other costs, and
- Inventory at end of year.
The other calculations will be done for you once you enter the appropriate values. To easily find your inventory at the beginning of the year, you can look at your profit and loss statement from the previous year. Your closing inventory for one year is almost always your beginning inventory the next year. If it is not, you will need to provide an explanation.
Part IV: Information on Your Vehicle
Do you have a vehicle you are claiming car or truck expenses on? If yes, you must fill out this section. If not, you can skip it. This section will help you calculate the value to place on line 9, in Part II. In order to complete this section, you must have documented your business miles for the current year. You can purchase log books or use an Excel template to track your mileage for next year. Answer the questions honestly to ensure you meet the requirements to deduct car or truck expenses. These include questions about your personal use of the vehicle, the number of miles driven, and whether or not you have written evidence to back up your deduction.
Part V: Other Expenses
Some businesses may have other expenses that weren’t previously reported on their P&L form. If yours does, you can use this section to list them.
Here are some frequently asked questions about profit and loss forms and this template.
To calculate the profit and loss of your business, there are three steps you must take. They all involve addition or subtraction, so you want to make sure you do the math carefully.
First, you add up all of the income your business received. Then, you add up the business expenses you incurred. Finally, you calculate the difference. This difference is your profit or loss.
The rules and regulations for profit and loss statements will vary from company to company. Smaller businesses and sole proprietorships often create one every month. Larger companies typically report their income and expenses on a quarterly basis.
All businesses need to know their bottom line. A profit and loss statement can help them quickly determine that number.
There are certain times when you will be required to provide this information to others, such as when you’re filing taxes, looking for investors, or want to sell your business.
In the United States, the IRS requires aSchedule C (Form 1040) if you’re a sole proprietor. Self-employed people with a small business often meet the requirement for the simpler version, the Schedule C-EZ. Your P&L form will have the information you need to complete either of these tax forms accurately.
If you are looking for investors for your business, they will also be interested in seeing your bottom line. They want to know that you have a profitable business before they hand over funds. Stakeholders will also want to see these records on a regular basis.
Finally, if you ever want to sell your business, potential buyers are going to want all of the numbers. They want to know what they are looking at before they buy, and make sure it’s going to be a good investment.
Who Can Complete a Schedule C-EZ?
If you are a sole proprietor, you may be eligible to use a simpler version of Schedule C. This modified version is known as the Schedule C-EZ. Here are the requirements:
- You only have one business, and it is a sole proprietorship.
- Your expenses do not exceed $5000 per year.
- Your business was profitable. You don’t hold inventory for your business.
- You don’t have any employees.
- You’re not claiming the deductions for a home office.
To qualify, you must meet all of the above requirements.
In section one of this form, there is a place to record “returns and allowances.” Returns represent products that customers have returned. Allowances are discounts that you offered a customer if they agree to keep a defective product.
Sales returns and allowances get deducted from your total sales. Your accountant can help you track these appropriately. If you’re curious about how these should be recorded in your books, this article has some clear examples:
Double Check Your Numbers
Before finalizing your profit and loss form and handing it over to interested parties, take time to double check your numbers. There are so many lines, it’s easy to skip over one accidentally. You want this form to be accurate, since it contains important information about your company’s financial state. You can update this form any time to see your net profit or loss.
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