The Profit & Loss statement, also called the income and loss statement, summarizes the income and expenses for a period. It is one of the most useful reports for a business owner, but its value depends on the accurate recording of transactions.

Start with revenue

Compare the reported income to what you expect based on your business activity. If the amount seems too high or too low, check for duplicate deposits, income posted to incorrect accounts, or payments that haven't been properly applied yet.

Review the main expenses

Observe which categories account for the majority of expenses. A large change compared to previous months doesn't always mean there's an error, but it does warrant an explanation. It could be a major purchase, an annual expense, or incorrect categorization.

Search for accounts with generic names

Categories like “Other Expense,” “Ask My Accountant,” or similar accounts may accumulate transactions that haven't yet been reviewed. These aren't necessarily incorrect, but it's advisable to investigate their contents before using the report as the final version.

Compare several months

Looking at a single month can obscure trends. Comparing multiple periods helps identify increases or decreases in revenue, payroll, contractors, supplies, and other recurring expenses.

Confirm that the accounts are reconciled

A profit and loss report can appear reasonable even if the bank statements haven't been reconciled yet. Therefore, it's advisable to review the report in conjunction with the reconciliations and not treat it as a standalone verification that everything is correct.

What does Profit & Loss not show?

Not all business transactions appear as income or expenses. Loans, certain debt payments, owner contributions, and other transactions may affect the Balance Sheet instead of the Profit & Loss statement. Therefore, both reports should be reviewed together when necessary.

Use the report as a tool, not just as a requirement

An organized Profit & Loss statement allows you to better understand what's generating revenue and where money is being spent. If it's only reviewed once a year, much of its usefulness for making decisions throughout the year is lost.

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