Understand Your Profit and Loss Statement (Using QBO)

Hello, everyone. Today we are going to talk about profit and loss statements. I will give you a brief overview and then I will show you how to read a profit and loss statement that is generated in QuickBooks Online. And although we're using QuickBooks Online, keep in mind this applies to any type of profit and loss statement. My name is Ronica Cannon. I'm a cpa, a CFA, and the founder of Montreal Financial, where you can find lots of resources for small business and you can sign up for my newsletter. So the first concept I want to talk to you about are financial statements. And a financial statement is essentially a collection of financial reports for any business. And they include, minimally, a balance sheet, a profit and loss statement, and a statement of cash flows. That being said, if you're a very small business, you can often just get away with a profit and loss statement, certainly for tax purposes, because you were taxed on the profits of the business. If you're incorporated, you would also need a balance sheet. But that's another discussion. So the way that the balance sheet and the profit and loss statement, which is also referred to as the income statement, are constructed, is based on the chart of accounts. So if we go over to the chart of accounts here in QuickBooks Online, you will see a list of all of your accounts and every account is assigned to an account type. The account type dictates what statement the account will appear on. So you'll see you have assets, and then you have liabilities, and then you have equity. All of these appear on the balance sheet, which will be the subject of another tutorial as we come down. Everything that starts with income and below relates to the profit and loss statement. And so when you're setting up your chart of accounts, you would want to set it up in a way that makes sense for your profit and loss statement and with the information that you want to see. Once you've set up your chart of accounts, most of you who are using accounting software or even a spreadsheet are allocating your income to a sales account. And your expenses are going to different categories. For example, you might have advertising, bank charges, vehicle expenses, dues and subscriptions, etc. And when you're in your banking tab, you are essentially allocating transactions to these categories. Similarly, if you are entering invoices, those invoices are mapping to an income account. And that income account is one that is set up in your chart of accounts. So let's now go to a profit and loss statement, and I will explain each category on the report. So in Quickbooks Online, you would go to reports.

And here I've already set up a custom report. But let's just go to your standard reports and it's usually in under your favorites or you can scroll down and you can find it under business overview. So let's click on profit and loss. And I want to see last year, so I have a full year. So let's click on last fiscal year run report. And this is a very simple profit and loss report for the Sherlock Holmes Detective Agency. And you can see that this is actually editable. So now here you'll see the structure of a profit and loss. And it is always this structure. You start with income, and your income essentially are your sales, your revenues, any other primary sources of income for your business. So if you sell products, you could have sales of products. If you sell consulting services, you could have that as a separate category. Here you don't want too many categories, but certainly you want to capture your primary sources of income. Under that you have your cost of goods sold. And cost of goods sold represents the direct costs of making a product.

So, for example, Sherlock Holmes sells magnifying glasses. And so the cost of the glass, the cost of the handle, the cost of the screws, the cost of glue, label shipping, etcetera, Are directly related to, to the assembly of a product. And therefore they go under cost of goods sold. They're a direct cost of the product. Under that you have expenses. And these are also referred to as operating expenses. Or they can also be called overhead. And you'll hear the term overhead a lot. And it's simply expenses that are not direct expenses of running the business, but they are operating costs. They are ongoing recurring operating costs. They're not unusual items. So for example, you have advertising, occasionally you'll have bad debts, you have bank charges, car expenses, dues and subscriptions are very common. You might have salaries, then you can have your home office expense expenses. All of these again are ongoing recurring costs of the business. And then you'll see with this format, you have in every section you have a total. So I can look at the profit and loss and see my total income or my total sales for the last fiscal year. And the last fiscal year was December to November. Keep in mind, this could be any period. It could be one month, it could be two weeks. It depends on whatever period you want to look at. So you have the total income and relating to that total income, you have your total cost of goods sold, and then you have your total expenses. Now your profit is essentially your total income less Your total cost of goods sold, your gross profit is this minus this. And then your profit is your gross profit minus your expenses. In many cases you won't have any cost of goods sold, especially if you're a service based business. So this line just simply wouldn't be there. So then your profit would be your total sales less your total expenses. Now if your total expenses exceed, exceeded your gross profit or your total income, then you would actually have a loss. And so this statement is very, very useful to see how your business is doing. And really, if you're a business owner, it's really essential to see what these numbers represent. And there's all kinds of analysis that can be done here. So you can compare this to a previous year. So if we were to select period here, go previous year run report, we can see that our income went up substantially from last year. Our purchases went up a little bit because they really only relate to the product sales. And then we have our other expenses. And again, advertising went up a little bit. There were no bad debts last year, but there were some this year and so on. We had a little more labor and we just started paying ourselves a salary. And so this is an, actually it's a wealth of information and there's all kinds of ways to slice and dice it. Another thing that you could look at, for example, is the, the percentage of income. So if we click on that, we can see that represents, so if our, for example, if we want to spend 5% of our sales and advertising, we can see we're within that range. If we wanted to spend 10%, we actually can spend quite a bit more on advertising. And this can also be compared to previous years. So that is another metric that you can use. So essentially in addition to actually seeing your numbers, how much you had in sales, 100,000, but you really only had 5,000 in profit, although $50,000 in salaries were paid. Right. So there's reasons for that. You can get again a great amount of data about your business and you can also see trends in your business. You can see that your sales are increasing and that everything is kind of in line. And, and that our advertising expenses actually have remained pretty constant despite our sales having gone up quite a bit. So they're significantly lower compared to last year. When you look at it as a percentage of sales, we can see that we had a bad debt this year. Maybe this is the start of a trend. So these are things that you want to pay attention to and it depends on what you're interested in. And again, this is A very simple basic profit and loss statement. Every company, every business, every entity prepares one. Some variation on this. The larger businesses will have something that's a little more complicated, so they might have other expenses, other income. There is also something called ebitda, which is earnings before interest, taxes and depreciation and amortization. But that's a little more complicated and doesn't really apply apply to a lot of small businesses. But there's just extra sections. So it adds to the analysis. In addition to trends, you might want to look for items that stand out. So my salaries really stand out. I had no salaries last year and this year I have $50,000 in salaries. So that is something that I might want to pay, pay attention to. My travel costs are not much higher. They're similar to last year, but maybe on their own. What did I spend $3269 on? And in QuickBooks, this is actually really useful. You can just click on this line item and it will tell you exactly what's in here. Here there's a journal entry, but generally speaking, you would enter your travel expenses either as bills or expenses and you would have all of the detail in there. And another thing that you can look at are your profit margins. So even though my sales were significantly higher, my profit is really not much higher than last year. But again, this relates to the salaries. So $50,000 of salaries were paid to Sherlock Holmes and therefore the profit margin is much lower than it was was last year relative to the sales. So this is just again a short tutorial on your profit and loss statement. I would love to hear what you look for in your profit and loss statement or if you have any questions about it, please leave a comment and I'll be happy to answer it. And if you found this video useful, please like and subscribe and I will see you next time. Have a great day.