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Why is a Profit and Loss Statement Important?

Profit and Loss Statement and Why It's Important

Profit and loss statements are different types of financial statements that show a summary of expenses incurred, cost, and revenue over certain periods of time. These statements are and can be used to monitor, compare, and contrast financial aspects of your business through historical data from one quarter to the next, or from the entire business year.


The data from these financial statements is also used for year-end business operations and tax filing purposes to ensure your business has healthy basic accounting and financial practices. There are several ways you can use the profit and loss statements for personal and professional use.


Personal Use of Profit and Loss Statements


When thinking of personal finances, you don’t always think about your financial aspects in a “fiscal year,” you just think of it as a year. You either look at it as if you made good money from your job that year, or you didn’t. But think about it this way, your personal life is also run as a “business.” When you budget your finances for your household, you are still taking steps to budget and manage the operations of your daily expenses pertaining to your life.


Things that are in your personal budget are bills, rent/mortgage, Homeowner Association fees, Land Taxes, vehicle registrations, the cost of fuel and vehicle maintenance, groceries, home, vehicle, life, and health insurance, and so on. These are all financial aspects of running the “life” which is your “business.”


So how can you use a profit and loss statement for your personal finances? In the case of personal finance, you will use what is called the Simple Profit and Loss statement. The Simple Profit and Loss statement helps you track what money is saved and goes into your savings account, what money is made from side jobs, your job, and what money is considered an investment or a loss. Investments are also a part of income which is taxed as the “total taxable amount of income.” Let’s look at some things that surround these areas of your finances.


Income


·       Wages earned from a job (W2, MISC, 1099-NEC, Side Jobs (self-employment).

·       Wages from investments that have a ‘return,” or “yield” (Savings Bonds, Crypto Currency, CD accounts, etc.).

·       IRA, Savings, Health Savings, or IRA Roth savings accounts which incur interest.

·       Savings accounts with interest (APR – Annual Percentage Rates).

·       Family, job bonuses, fringe benefits, or friends giving you money, etc.


Expenses


·       Mortgage/Rent

·       Bills (Lights, Gas, Water, Phone, Internet).

·       Emergency Expenses (hospital bills, funerals, tire replacement, deductibles, etc.).

·       Deductibles (roof replacements, plumbing issues, home improvements).

·       Groceries

·       Health Insurance costs – out of pocket

·       Debt – credit card debt, student loans, and other debt.


Most government-based funding is not taxable such as grants and loans for personal expenses such as rent and bills, SNAP (food stamps), Supplemental Security Income (SSI), Veterans Benefits, and Temporary Assistance for Needy Families (TANIF). TANIF may have another name based on the state you live in. This type of “financial aid” is not classified as taxable income.

Proft and Loss Statements for Business


The most common use of the Profit and Loss Statement is for business accounting purposes. It helps businesses track their profit) income) and expenses (losses) throughout the business operations year. Depending on the type of industry your business is in, this determines the types of expenses incurred during the business year.


The Key Components of a Profit and Loss Statement


There are detailed and simple profit and loss statements. Each one is used for the financial analysis of your business operations. You can use the simple profit and loss statement, which can also be used for personal finances, or you can use the detailed profit and loss state and adjust your variables for the types of financial information and data displayed in the document.

Some profit and loss statements for business can show you line items for expenses and income which display how much you have spent on specific items or a total amount of how much you have spent on operational costs. Everything from costs of labor, packaging, machinery, office equipment, and shipping expenses, employee/contractor pay, vendors, and much more are displayed in the profit and loss statement.


Elements of a Profit and Loss Statement (Business).


·       Operating Expenses

·       Net Income

·       Revenue

·       Gross Profit

·       Cost of Goods Sold (COGS)

 

Overall Summation of what is displayed in the profit and loss statement:


Total income for the year $

Total Expenses for the year $

Difference $


Now that we have covered some of the profit (income)and loss (expenses) items that pertain to personal finances, let’s move forward on how you can use this data and information on your personal taxes at the end of the tax filing year.


When filing your personal and business taxes, you can incorporate the information from a spreadsheet in excel, or if you have tracked your financial health through an external application such as QuickBooks, you can then incorporate the information into your tax filing software for ease of tax filing purposes. The information in the profit and loss statement is then tracked on the Schedule C form which is a part of the self-employment and business tax filing forms for Form 1040.


When using the information for personal financial tracking, you will provide this information to your tax preparer, or personal accountant. When the profit and loss statement is used for personal finances, it helps with your deductions and credits, and maximizing your write offs. We will cover write offs in another blog.


When you have healthy financial tracking it can benefit personal vacations, and help with tracking expenses for saving for family and personal vacations, purchasing large items to reward yourself for all your hard work such as a home, or car.


When thinking about healthy financial tracking regarding business operations, it can benefit you when seeking funding for business operations and expansions, purchasing large equipment for business operations, and taking out lines of credit. I hope this blog has given you some insight and information on how financial tracking can be useful in your personal and business finances.

 

Please provide feedback so we can improve the quality and information provided in our blogs.

Thank you, and enjoy!


Resources:


Profit and Loss Statement – Business Finances

Simple Profit and Loss Statement – Personal and Business Finances

 

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