From invoices to quarterly taxes, self-employed individuals have a lot of paperwork to stay on top of. While there's no legal requirement stating you must file a profit and loss statement with any regulatory agency, you should still consider compiling one so you know exactly what's happening with your small business's finances. This attention to detail now can mean the difference between business success and failure in the long run.
Definition of a profit and loss statement
A profit and loss (P&L) statement, which may also be called an income statement or income and expense statement, allows a business owner to see in one quick view how much money they are bringing in and spending—and how. A profit and loss statement is different from a banking statement in that you are keeping track of all funds that flow through your business, not just bank transactions.
To that end, the two main features of a profit and loss statement for a small business are income and expenses. When listing these two items, you should think as broadly and comprehensively as possible. Whether or not items have income tax consequences—that is, regardless of whether you have to claim items as income or can deduct them as legitimate business expenses—you should include them on your profit and loss statement to ensure you're getting the fullest possible picture of your business's finances.
Setting up a profit and loss statement
The simplest way to set up a profit and loss statement is by using your favorite spreadsheet program, such as Excel or Google Docs, although this type of report comes as built-in functionality in a lot of accounting software. Most business owners choose to create a monthly statement so that they can see each period individually as well as the year at a glance, which is done by simply totaling the rows. The time frames should run across the top of the spreadsheet.
On the side rows, in addition to those for income and expenses, you should have a row for your net income, i.e., your income minus your expenses. On the far right, you can total all the rows so that you can quickly check your business's financial progress on a monthly and/or yearly basis.
Note that for maximum benefit, you probably want to break down your income and expense rows into individual items, like book purchases for research and your internet connection. If you get paid from several different sources, you can also itemize those, making it easier to monitor increases and decreases from various clients.
Monthly maintenance of the profit and loss statement can ensure you're getting the maximum benefit from this important business document. But remember that your profit and loss statement is not a static document: you can always adjust it to fit your business's needs and it can grow along with your enterprise.
A profit and loss statement for self-employed individuals can be a critical part of staying on top of financial transactions throughout the year and can provide a methodical way for you to monitor your business's ups and downs. Although you can choose to handle this responsibility yourself, an online service provider can provide an added layer of confidence that your business is in the best financial shape possible.
Find out more about Business Accounting
FAQs
What should go into a P&L statement? A profit and loss statement (sometimes referred to as an income statement) summarizes income and expenses for a given time period. There are common elements to include to make it useful. The most common approach is to list all revenues at the top and then all the expenses afterward.
What are the financial statements for self-employed people? ›
A self-employed profit and loss statement is a report that summarizes your business's revenues, expenses, gains, and losses over a given period. Also commonly referred to as an income statement, it's one of two essential financial statements for self-employed people, along with the balance sheet.
Does the IRS require a profit and loss statement? ›
Profit or loss from business (sole proprietorship): Schedule C (Form 1040) The IRS requires sole proprietors to use Profit or Loss From Business (Sole Proprietorship) (Schedule C (Form 1040)), to report either income or loss from their businesses.
Do independent contractors have a profit and loss statement? ›
There are multiple benefits of having a profit and loss statement, even as an independent contractor, which includes the following: Tax reporting – As an independent contractor, you are considered self-employed.
Can a tax preparer do a profit and loss statement? ›
Don't let the number crunching turn you away from these insights. That's why we're here. Block Advisors can create a P&L Statement for you as part of your annual tax preparation.
How do I write a profit loss statement for self-employed? ›
How to Write a Profit and Loss Statement
- Step 1 – Track Your Revenue. ...
- Step 2 – Determine the Cost of Sales. ...
- Step 3 – Figure Out Your Gross Profit. ...
- Step 4 – Add Up Your Overhead. ...
- Step 5 – Calculate Your Operating Income. ...
- Step 6 – Adjust for Other Income and/or Expenses. ...
- Step 7 – Net Profit: The Bottom Line.
How to Provide Proof of Income
- Annual Tax Return (Form 1040) This is the most credible and straightforward way to demonstrate your income over the last year since it's an official legal document recognized by the IRS. ...
- 1099 Forms. ...
- Bank Statements. ...
- Profit/Loss Statements. ...
- Self-Employed Pay Stubs.
You need receipts for all expenses, regardless of amount, except expenditures that are less than $75 for1. · entertainment, · overnight travel, and.
Who prepares a profit and loss statement? ›
You can ask your accountant to prepare a profit and loss statement for your company or you can build one yourself using the steps below.
Where can I get a profit and loss statement? ›
The P&L is found in the annual financial reports that all publicly traded companies are required by law to issue and distribute to shareholders. 1 Annual financial reports include a company's P&L statement, balance sheet, and a statement of cash flow. Financial statements are found on a company's website.
Preparation of the profit and loss account
This means income such as grants, cash injected by the owners and bank loans received are generally not shown here, and any purchases of significant equipment, loan repayments, drawings, HM Revenue & Customs payments etc won't be shown either.
How to report self-employment income without a 1099? ›
Self-employed persons, including direct sellers, report their income on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). Use Schedule SE (Form 1040), Self-Employment Tax if the net earnings from self-employment are $400 or more.
Can you 1099 someone you paid cash? ›
Cash payments of $600 or more to an independent contractor should be reported on a 1099 form, regardless of the payment method. Neglecting to issue the appropriate tax forms for cash payments can lead to tax implications and penalties.
How do I create a profit and loss statement for my tax return? ›
Here's a general step-by-step guide to creating a profit and loss statement:
- Choose a reporting period. ...
- Gather financial statements and information. ...
- Add up revenue. ...
- List your COGS. ...
- Record your expenses. ...
- Figure your EBITDA. ...
- Calculate interest, taxes, depreciation, and amortization. ...
- Determine net income.
Accounting software like QuickBooks Online makes creating your P&L and other financial statements easy, as well as assessing your spending.
What is considered an audited profit and loss statement? ›
Audited financial statements are those that have been reviewed and verified as accurate by a Certified Public Accountant (CPA). Any company may require audited statements for internal use or to present to external stakeholders. The company prepares the financial statements and presents them to a CPA for assessment.
What is an example of a self-employment statement? ›
I confirm that I have been self-employed since (date) and operating under the business name of (business name or personal name). This business is a (sole proprietorship or partnership), and I own XX% of it. My gross income for the year of (year) was (dollar figure of income).
How do I make a balance sheet for self-employed? ›
Here are the steps you can follow to create a basic balance sheet for your small business.
- Specify the Reporting Period. ...
- Identify Your Assets. ...
- Determine Your Liabilities. ...
- Determine Shareholders' Equity. ...
- Add Total Shareholder Equity and Total Liability to Compare to Assets.
Let's look at the top 5 financial steps to help prepare for the adventure of self-employment:
- Find the Best Business Structure for Filing Taxes. ...
- Establish Business Credit. ...
- Obtain the Best Types of Insurance. ...
- Manage Your Cash Flow. ...
- Prepare for Retirement. ...
- Educate Yourself About Self-Employment.
Choose your method of self-employed accounting
Self-employed people have the choice between multiple accounting methods: cash basis, accrual basis and hybrid accounting. Cash basis accounting involves recording income and expenditure when you pay or receive money. The recording part happens when money changes hands.
