"Hold on," says Seth David of Nerd Enterprises and School of Bookkeeping, based in Burbank, California. He says that asking how much money you've made is asking the wrong question.
Accuracy and understanding are critical. The P&L is important if the data is entered accurately and business owners must understand how it impacts the balance sheet and statement of cash flows.
Seth details the issue in his write-up The Profit and Loss Statement found on the School of Bookkeeping website. In the simplest form, the P&L has three sections: income, cost of goods sold, and expenses.
Then Seth shows how it quickly becomes more detailed. "We can have 'paper' expenses that don’t impact cash, such as depreciation and amortization. We can defer revenue and expenses, effectively moving them over to the Balance sheet as 'accruals.'"
You can understand your overall bookkeeping needs with this list of basic terms:
- Cash – all transactions go through the cash account
- Accounts Receivable – money that's due from customers
- Inventory – products in stock to sell
- Accounts Payable – money you owe
- Loans Payable – what you owe on what you've borrowed
- Sales – where you track revenue
- Purchases – tracking raw materials or other goods purchased for your business
- Payroll Expenses – employee costs
- Owners Equity – tracking the investment the owner has put in
- Retained Earnings – tracks profits that are reinvested in the business and not paid out to owners
A bookkeeping best practice is to update books weekly and then review the data monthly to see where you're on track to become profitable and where you need to make adjustments. Want to learn more? Watch Seth David's Bookkeeping Basics 1 below.