# How to Build a Basic P & L

A profit-and-loss statement, also known as an income statement or P & L, is a document prepared by businesses on a quarterly basis. The document details a company's sales and expenses for calculating net profit. The IRS will in turn use net profit for income tax purposes. The structure of a profit-and-loss statement will differ based on company type and size. All profit-and-loss statements, however, have three main sections: net sales, cost of goods sold, and general and administrative expenses.

## Net Sales

A typical profit-and-loss statement begins with the company's net sales. A company's net sales equal total sales, minus any discounts or returns. You must have an adequate bookkeeping system to record net sales, and many modern cash registers have this function built in, saving you lengthy calculations. For the sake of simplicity, assuming that total sales are $5,000 for the quarter, and discounts and returns amount to $500, then your company's net sales are $4,500.

## Cost of Goods Sold and the Gross Margin

The cost of goods sold is the price you paid for any merchandise that your business may sell. Therefore, if the cost of your inventory before the start of the quarter was $250, and you bought $500 worth of merchandise purchases that incurred a shipping cost of $200, adding up all these costs gives you a total of $950. If the cost of the inventory at the end of the quarter was $400, then subtracting this value gives a total of $550. The company's gross margin is the net sales minus the cost of goods sold. Using the same example, subtracting $550 from $4,500 gives a gross margin of $3,950.

## Administrative and General Expenses

Once you have your gross margin, you should add up all of your administrative and general expenses. The range of these expenses varies with different types of companies. They may range from rent and the salaries and wages that you pay your employees to utility bills, depreciation expenses and any miscellaneous costs, such as plumbing.

Once you have totaled up these expenses, you should subtract from the gross margin to calculate the company's profit from operations. Thus, if administrative and general expenses are $2,200, and the gross margin is $3,950, then the company has a total profit of $1,750 from operations for the quarter.

## Other Sources of Income and Expenses

After deriving profit from operations, you must add "other" sources of income and "other" expenses to derive the company's net profit before taxes. Other income that the company may receive includes interest, royalties, rents or any source of income that does not come from the business's main operations. Other expenses may include lawsuits, repairs or any cost that the company does not normally incur. Therefore, referring to the same example, adding other income of $200 and subtracting other expenses of $50 from total profit of operations gives a net profit of $1,900 before taxes.

## Net Profit After Tax

The net profit after tax is the final calculation on a profit-and-loss statement. You must first calculate the company's provision for income tax, which is an estimation based on federal income tax rates as well as the current tax rates for your state. If federal income taxes are 2 percent and your state's income tax rate is 10 percent, taking 12 percent of $1,500 gives a tax provision of $218. Subtracting this provision from your net profit before taxes equals a net profit of $1,782 after income tax.