How to make a profit and loss statement

What actually goes on it

Start with revenue: everything the business earned during the period, before anything is taken out. Then the costs that rise and fall with the work itself — materials, the food, the parts, the goods you resold. Then the costs that stay roughly the same whether you are busy or not: rent, insurance, software, phone, professional fees. Subtract everything from revenue and the remainder is the profit or loss.

The categories are not something you invent. The return a small business files is organised the same way — the sole proprietor's form is literally titled Profit or Loss From Business, and it lists the expense kinds the IRS expects to see. Using those same groupings is the single easiest way to make sure your statement and your return tell one story.

Choose the period before you start and put it at the top: 'For the year ended December 31' or 'For the six months ended June 30'. A statement without a stated period is the first thing a careful reader stops at, because they cannot tell what they are looking at.

Building one from what you already have

If you have been keeping books, the statement comes out of them and this part is done. If you have not, your bank statements are the record — every dollar the business received and spent through that account is on them, dated, in order.

Work one month at a time rather than as one pile. Go down the month, decide what each line is, and put it in a category. At the end of the month, check that your totals agree with what the statement itself says came in and went out. A month that will not agree is a signal to look again, and finding it in a single month is far cheaper than finding it across a whole year.

Then lay the months side by side in columns. Twelve columns across a page is not decoration — it is how a reader sees whether the business is steady, seasonal, or going one direction, and it is how you catch your own mistakes. A month where one category triples is usually a miscategorised transaction rather than a real event.

The five things that go wrong

First, money that arrived but is not revenue. Transfers between your own accounts, money you put into the business yourself, and loan proceeds all look exactly like a sale on a bank statement. Counting them as revenue overstates the business and, on a return, means paying tax on money nobody earned.

Second, card settlements. If you take cards, the money usually lands a couple of days late and already reduced by the processor's fee. If you use the deposit as your sales figure, you understate what you actually sold and the fee disappears entirely instead of showing up as a cost.

Third, refunds you issued. A refund reduces revenue. Filing it as an expense leaves both sides of the statement overstated.

Fourth, personal spending from the business account, which happens in almost every small business and needs to come out rather than sit in a category where it inflates costs.

Fifth, a missing month. Statements that cover ten months of a twelve-month period produce a figure that is simply not the year, and the gap is the thing that becomes expensive to explain later.

Making it something a reader will trust

Say plainly how it was prepared. A short note explaining that the figures come from the business's bank records for the period shown costs you nothing and answers the question a reader would otherwise have to ask.

Label it unaudited, because it is. Nobody expects a small business to hand over audited financial statements, and claiming more than you have is what turns an ordinary document into a problem.

Sign it. Most readers who ask for a P&L from a business without an accountant are asking for an owner-prepared statement, and an owner-prepared statement is one somebody stood behind. A line with your name, your title and the date is the difference between a spreadsheet and a document.

And keep what is underneath it. Your records are what support the figures if anyone asks, which is the whole reason the IRS asks a business to keep them. The statement is the summary; the statements and receipts behind it are what make the summary hold.