Prepare a profit and loss statement

Start by fixing the period the statement covers. business.gov.au says a profit and loss statement is usually completed every month, quarter or year. For a statement covering the usual Australian financial year, the period runs from 1 July to 30 June.

The statement follows the accounting method your books use. business.gov.au explains that cash accounting records a sale when the customer pays and a cost when you pay the bill, while accrual accounting records them when they take place. The same month can look quite different under each method, so state which basis the statement uses and keep to it from one period to the next.

A profit and loss statement can only be as complete as the books behind it. Before you run any reports, bring every account up to the last day of the period:

• Enter every sales invoice and every customer payment dated in the period.
• Enter every supplier bill dated in the period. On accrual books, look for bills that arrived after the period ended but relate to goods or services received in it, and check with your accountant how they should be recorded.
• Reconcile each bank account and credit card to its statement at the last day of the period.
• Bring petty cash up to date and count it.
• Stock on hand: update the stock figure, and count it on or near the last day where you can.
• Check that personal spending paid from the business account is marked as personal. business.gov.au says that if one account is used for both, personal payments must be clearly identified in your cash book.

Once the period has been checked, stop further changes to it. A late entry dated in a closed period changes figures you may already have reported.

A trial balance lists the general ledger accounts and their debit or credit balances at a date. Its totals should agree, but income and expense balances may cover the financial year to date. For a monthly or quarterly profit and loss statement, use the income and expense activity for that period's start and end dates, such as a period-movement report, and reconcile it to the ledger. Check how any closing entries are handled before using the figures.

Equal totals show the entries balance, not that each one is in the right account. Before going further, read down the income and expense accounts and look for:

• an account with a balance on the unexpected side, such as an expense showing a credit
• amounts sitting in a suspense or uncategorised account
• a regular cost, such as rent, that is missing for part of the period or appears twice
• a large one-off amount you don't recognise.

Trace anything odd back to its source document and correct it before you go on.

Only income and expense activity for the selected reporting period goes into a profit and loss statement. Asset, liability and equity balances belong on the balance sheet. Group the period's income and expense activity into the statement's lines, from the top:

1. Sales: income from selling your goods or services.
2. Cost of goods sold: the direct costs of what was sold. Sales less cost of goods sold gives gross profit.
3. Expenses: the costs of running the business, gathered into a manageable number of lines. business.gov.au's template uses lines such as advertising and marketing, rent and rates, utilities and insurance.
4. Other income, such as interest received, shown apart from sales so it doesn't blur the trading result.
5. Net profit: what remains once expenses are taken away. business.gov.au works it out by subtracting expenses from sales.

Keep the same groupings every period. If you rename or split a line, apply the change to the earlier periods you compare with, so the comparison stays fair.

Some payments are not expenses at all, such as the part of a loan repayment that reduces the amount borrowed, and a larger purchase such as equipment may belong on the balance sheet instead. Money owners put in or take out needs care too: depending on the business structure and the arrangement, it may not be income or an expense at all. How a particular purchase or payment is treated is a question for your accountant.

Head the statement with the business name, the words profit and loss statement, the exact period it covers and the accounting basis. Then add up each line and work down to net profit.

If a figure is an estimate, such as a cost you expect but haven't been billed for, business.gov.au says to label estimated figures clearly.

Run a few checks before the statement goes to anyone:

• Net profit should equal income less expenses for the selected reporting period, reconciled to the general ledger.
• Each line should make sense next to the previous period and the same period last year. Look into any big swing.
• Monthly costs such as rent should appear the right number of times for the length of the period.
• If you prepare a balance sheet for the same date, the profit for the period should flow into its equity section.

File the trial balance, the reconciliations and any notes on adjustments with the statement. For a company, the Corporations Act requires written financial records that accurately show and explain its dealings and its financial position and performance, in a form from which true and fair financial statements could be prepared and audited.

The Act's meaning of financial records takes in the working papers that explain how financial statements are made up and the adjustments made in preparing them. A company must hold on to those records for 7 years once the transactions they record are complete. For business records generally, business.gov.au gives 5 years as the usual period.

Year-end statements often need adjustments before they are final. business.gov.au says a bookkeeper may prepare some financial statements, and lists preparing them among the things your accountant can do, so agree early with your accountant which adjustments they will make.