You will not be able to learn how to calculate profit and loss if you do not know the formula. It is rather very simple: Profit = Revenues – Expenses
How to calculate profit and loss: Step by step guide
- Gather Information
Your first step would be to prepare all the financial data necessary for the calculation. If you have a Trial balance at hand, then you are all set. Otherwise, have all your business bank transactions on hand. You will also need to have a record of transactions you made with cash. This might include your petty cash book, as well as any receipts for cash purchases. Finally, if you had income sources that were not included in your bank or cash records, then prepare a list of all your income sources.
- Revenue
Your next step would be to add up all your revenue for the period. Depending on what your business is doing, it will be revenue from sales or revenue from the provision of services. If you have several revenue sources, it is best to list these separately.
- Expenses
The next step will be itemizing all your business expenses. Start with the biggest expenses for your business, for example, cost of goods sold if you are a manufacturing business or cost of services provided if you are a service-based business. Your revenue minus COGS will give you gross profit value, but we are not done yet.
You would also need to subtract operating expenses, which are expenses related to the daily operation of your business. These can include your wages expenses, utility expenses, insurance expenses, etc. Next, you would subtract your non-operating expenses, such as interest expense.
- Taxes
All businesses (with some exceptions) have to pay taxes. So, now that you have all your expenses subtracted from the revenue you received, you can go ahead and also subtract the amount of income taxes you paid.
- Net income
We are practically done explaining how to calculate profit and loss. Now, all the expenses, including taxes, have been taken out of the total revenue. Depending on whether you received a positive or a negative amount, you will be able to tell whether your company made a profit or loss. A positive figure means that your company received a profit for this period, while a negative figure means that your business experienced some losses. Now, you know how to calculate profit and loss from scratch or with the help of already available data. Just follow this step-by-step guide and lead your business towards success!