Business fundamentals that are very important to your success in business involve the financial side of your venture. This is the profit and the loss. Balance sheet and cash flow statements are the two important statements that help in evaluating the progress of the business each month, but the profit and loss statements, or simply the financial statements of a home business, tell all about the worth of that business. It is smart to keep track of and assess these statements to make sure your business is financially stable.
Profit and loss are pretty easy to understand. It is a basic economic concept that applies to most businesses. It is a great way to find out how much money you are making and how much you are spending. Profit is your plus and loss is your minus. In most economic and financial software programs, the profit and loss statements are generated automatically after you key in all your income and expenses for each month.
Income of the Business
For your income, for instance, all of the money are the US dollars that come in any given month. This money is possibly from receivables, maybe interest, or any other reason why you would have money coming in from a company.
Expenses of the Business
Your company’s expenses are everything that you spend money on throughout the month. Some of the big ones may be rent, salaries of your employees, postage, insurance and almost anything else that you can think of that your business would have to pay for. This is the money that goes out.
How to Calculate Profit and Loss from Income and Expenses
For your profit and loss statement, all the positive amounts would be given in positive numbers, and the negative amounts will have minuses with the numbers, or sometimes they are shown with numbers in the parenthesis. In the end, you will have your total, and hopefully, if you have done your business well, this will be a profit, and it will show a number that is positive. In this way, you will have profit and loss statements depending on your income and expenses.
Importance of Financial/Profit-Loss Statement
When you play a sport or game of some kind, why is it important to keep track of the score? How will you get to know at the end who won and who lost? This is not difficult if you have the scorecard. It will tell you everything about the game.
In the case of business, the scorecard is your profit and loss or financial statement. In business words, we speak in numbers; primarily, we speak in accounting terms to evaluate the progress, regardless of what kind of business we are running. You have to keep track of your business just like you keep track of the stock market through different ways, such as, by using applications like Investors Hangout. It may be wise to invest in accounting software as well to manage your financial records.
The profit and loss from the past is the outcome of your business’s efforts, and is different from the balance sheet and cash flow statement which tells about the present and the future.
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