A profit and loss statement also called an income statement or profit and loss account is a document summarizing all the expenses and income of a company over a period of time.
It is annual and mandatory (1). But it can also be done on a monthly or quarterly basis.
Summary
- First, we teach you how to differentiate the different types of profit and loss statement models.
- Second, we advise you on the best formats for your profit and loss statement.
- Finally, you will learn how to prepare a profit and loss statement and interpret its results.
What steps do we have to follow to make a profit and loss statement template?
Before we get into the details, we are going to explain the different types of profit and loss accounts, to know the most suitable for your company.
Then, we will tell you the groups of accounts of the general accounting plan that are used for the profit and loss statement.
Finally, we will differentiate the income and expense items, calculate the results and interpret them.
1. Types of profit and loss statement models.
The types are important because they will help you to frame your company by size and volume, to the model that you must use. They are in the General Accounting Plan (2).
- Normal profit and loss account
This model must be presented by all those business agents that do not use the abbreviated model, nor are they considered SMEs or self-employed.
- Abbreviated profit and loss account.
The general accounting plan is very clear about the agents that can use the abbreviated model, so we inform you about the requirements.
The abbreviated profit and loss account can be used by those companies (public limited companies, limited liability companies, cooperatives, etc.) that for two consecutive years comply with at least two of the following three conditions:
- First, the total of the asset items does not exceed eleven million four hundred thousand euros.
- Second, the net amount of its annual turnover does not exceed twenty-two million eight hundred thousand euros.
- Lastly, the average number of employees employed during the year does not exceed 250.
- SMEs profit and loss account.
SMEs, will also present the abridged profit and loss account (3). The reason is due to their size and lower turnover, and the benefit is the simplification in the presentation of their accounts.
2. What formats can you use to make a profit and loss statement template?
You can use the format you prefer, but our recommendation is that you use either an Excel sheet or a Google spreadsheet.
With both, you can share documents with other users, and you can perform different operations with functions provided by the specific accounting programs themselves, such as depreciation calculations.
3. Differentiation of Income and Expenses.
Once you have selected the format that you are going to use to make your template, we are going to help you to know which groups of the general accounting plan are the ones that you have to use and to distinguish them.
Our General Accounting Plan has 9 groups, in fact, it is where the different items with which we make the balance sheet, the profit and loss account, and the accounting entries that are recorded in the journal of a company are found. However, in the profit and loss account, we only use groups 6 (Purchases and Expenses) and 7 (Sales and Income).
| Income | Expenses | |
|---|---|---|
| Concept | Money received by the company for the provision of its services or the sale of its products. | Capital outflows are experienced by the company, as a consequence of its basic operation and volume of activity. |
| Types | Operating Income, Financial Income and Extraordinary Income. | Operating expenses, extraordinary expenses and depreciation. |
Next, these income and expense items must be recorded on the debit and credit sides (4). But what is this?
- It must: Records transactions for expenses, i.e., they subtract.
- Credit: Records transactions for income, i.e., which add up.
In other words, a debit entry is a debit and a credit entry is a credit (5).
4. Which accounts are part of the Revenue line item?
First of all, we are going to explain the items that go into group 7 (6).
Operating income
- Revenues from sales.
- Grants, donations, and legacies.
- Work performed by the company.
Extraordinary income
They are incomes but, they do not come from the usual activity of the company. For example, the sale or rent of premises and its item is profit from tangible fixed assets.
Financial income
- Positive exchange differences. This refers above all when the company works with different currencies and as we know they fluctuate and we can obtain differences in the final operation.
- Reversal of impairment of trade receivables. This refers to the recovery of receivables since these were in arrears.
- Income from receivables. For example, when we lend money to other businesses or companies of the same group.
5. Which accounts form part of the Expenses item?
Next, it is the turn of the expenses, which fall under Group 6.
Operating expenses
- Purchase of goods: includes the cost of products sold or services rendered.
- Personnel expenses: these are the expenses of our staff, such as wages and salaries, indemnities and social security paid by the company.
- The basic expenses of any company for its operation, we are talking about items such as electricity, telephone, transport, local taxes, etc.
Other operating expenses
Expenses of the company’s ordinary activity, but which are not included in any line item.
Depreciation
Loss of value of the company’s assets, either through use or the passage of time. For example:
- Depreciation for tangible fixed assets.
- Amortization for intangible fixed assets.
Extraordinary expenses
Occasional losses of the company but, unrelated to its ordinary activity. For example, a company suffers a fire in a warehouse that is not insured. The following are items that are part of extraordinary losses:
- Impairment losses on inventories.
- Impairment losses on trade receivables.
Financial expenses:
Interest on credits and loans that the company has requested. For example, one item would be interested in debts.
6. What results do we have to include in a profit and loss statement template?
Before starting with the results, do you know what EBITDA is? This result is the basis for understanding all the calculations that are made in the income statement.
In the following table, we summarize the results that should be in the profit and loss account and also explain how to calculate them.
| Result | Concept |
|---|---|
| EBITDA | Operating income – Operating expenses |
| EBIT | EBITDA – Depreciation and Amortization |
| BAI | EBIT + Financial income + Financial expenses |
| NET PROFIT | BAI – Corporate Income Tax |
7. How are the results interpreted? Profit or loss of the company
- EBIT: If we remain in profit, it indicates that the company is prepared to respond to unforeseen events.
- BAI: Profit before taxes, if this item is negative, we do not have to continue, if it is positive, we apply the Corporate Income Tax to the profit.
- NET PROFIT: are the profits that we have left, after applying the Corporate Income Tax. If we arrive at this item positively and we have enough equity in our cash flow to pay it, the company can continue in operation.
8. Example
Next, we present a profit and loss statement of a company, with differentiation of income, expenses, and results.
| Account No | Concept | Balance | Debit | Credit |
|---|---|---|---|---|
| OPERATING EXPENSES | ||||
| 601 | Purchases of raw materials | £460.000 | £460.000 | |
| 607 | Work performed by other companies | £25.000 | £25.000 | |
| 611 | Change in raw material inventories | £9.400 | £9.400 | |
| 621 | Leases and royalties | £30.000 | £30.000 | |
| 624 | Transportation | £46.000 | £46.000 | |
| 625 | Advertising, publicity, and public relations | £45.000 | £45.000 | |
| 625 | Insurance premiums | £313 | £313 | |
| 628 | Supplies | £120.000 | £120.000 | |
| 628 | Other services | £24.000 | £24.000 | |
| 640 | Wages and salaries | £105.000 | £105.000 | |
| 641 | Severance pay | £20.000 | £20.000 | |
| 642 | Social security payable by the company | £27.000 | £27.000 | |
| TOTAL | Total operating expenses | £911.713 | £911.713 | |
| OPERATING INCOME | ||||
| 701 | Sales of finished products | £2.400.000 | £2.400.000 | |
| 704 | Sales of containers and packaging | £50.000 | £50.000 | |
| 712 | Change in finished goods inventories | £120.000 | £120.000 | |
| 731 | Work on property, plant, and equipment | £35.000 | £35.000 | |
| 746 | Grants, donations, and capital legacies are transferred to income for the year | £1.000 | £1.000 | |
| TOTAL | Total operating income | £2.606.000 | £2.606.000 | |
| EBITDA | £1.694.287 | |||
| Depreciation and amortization | ||||
| 680 | Amortization of intangible assets | £3.000 | £3.000 | |
| 681 | Depreciation of tangible fixed assets | £2.900 | £2.900 | |
| 693 | Impairment losses on inventories | £64.000 | £64.000 | |
| 694 | Impairment losses on trade receivables | £10.000 | £10.000 | |
| TOTAL | Total amortization and depreciation | £79.900 | £79.900 | |
| EBIT | £1.614.387 | |||
| FINANCIAL INCOME AND EXPENSES | ||||
| 794 | Reversal of impairment on trade receivables | £30.000 | £30.000 | |
| 662 | Interest on receivables | £214 | £214 | |
| 665 | Interest on discounted bills of exchange and factoring transactions | £13.000 | £13.000 | |
| TOTAL | Total financial income and expenses | £43.214 | ||
| BAI | £1.571.173 | |||
| Corporate income tax | £235.676 | |||
| 129 | Profit for the year | £1.335.497 |
Conclusion
In summary to the previously exposed, you have verified that it is not difficult to make a template, the most complicated thing, is to locate correctly each expense and income.
Therefore, we hope that the article will be helpful to you, and in fact, we encourage you to take the leap and do your own accounting.
Once you have selected the format you are going to use to make your template, we are going to help you to know which groups of the chart of accounts are the ones you have to use and to distinguish them.
Our General Accounting Plan has 9 groups, in fact, it is where the different items with which we make the balance sheet, the profit and loss account, and the accounting entries that are recorded in the journal of a company are found. However, in the profit and loss account, we only use groups 6 (Purchases and Expenses) and 7 (Sales and Income).
