Have you ever wondered what details make up a profit and loss report and how to use all this information best?

Quickbooks is a wonderful tool that will put the critical business reports at your fingertips. Once you’re logged into your account, it doesn’t matter what screen you start from. Go to the left hand column and click “reports” and you can dive right in. It’s important to note that a profit and loss statement is relevant to a certain time period only so be sure to select the date range you are interested in.

When you think about your Profit and Loss statement, there are three big categories. The first category you’ll see is your income. These items can be positive or negative. For example, if you’re a graphic designer and you charge clients for design work, you’ll see positive numbers for graphic design income and if you give a customer a discount, you’ll see that adjustment as a negative value.

If you look closely at each line item, you’ll notice that they’re clickable. So if you click on the dollar figure associated with the item that says “Services,” you’ll be brought to a transaction report. It’s important not to confuse these transactions with invoices. What you’ll find on this page is the portion of potentially many different invoices that have been associated with “services” account.

It might not be obvious right now, but accountants often have to play detective. You might find yourself in the future asking what monies are associate with each account. Think of quickbooks as providing a trail of breadcrumbs that you can use to find the source of the funds.

Now let’s take a look at how you can use this same method to find the source of an expense.

Like before, we go down to the dollar amount, click on it to open the Transaction Report and we get a ton of useful information. All the relevant details are right there for you to see. The transaction date, type, account name, account type, the credit card type, the amount, and the balance owed.

Now it is important to note that any book keeping system is only as good as the data you put into it. If you click again on the dollar amount quickbooks will show you some finer detail. You will thank yourself in the future if you include a relevant description and any supporting documents like invoices or receipts.

Now let’s go back to the main profit and loss report and see how ambiguity can make your life a little tougher than it needs to be. Have a look at the figure below. You’ll see that we have an account called “miscellaneous” with $2,666 in it. Your accounting system isn’t just used to give you a bottom line at the end of the year – it’s meant to aid your business decisions. You as a business owner will be far more successful if you can infer and make good business decisions based on the information contained in your accounting system. Put your expenses in logical categories that are useful.

Fixing this is easy. Just go into the transaction detail for “miscellaneous” by clicking the dollar amount, pick one transaction, and update the category in the invoice to reflect the proper, logical placement for the expense.

Now that we know the basics of how to read, update, or modify these items in your profit and loss report, let’s see how we can use this information to look at how our business is behaving over time. Have a look at your profit and loss report, click the dropdown “display columns by” and select months. What this will let you do is better detect for anomalies. You will know your business best so you may know that you pay monthly insurance premium of $85.35 and you will see that expense in every column (month). Well what if one month you see it’s double that? Or it’s zero? You’ll be able to click into that expense and see what created that additional cost or you can look deeper into why the cost didn’t hit your account system. Maybe you accidentally paid on your personal credit card.

As a business owner, you use the profit and loss report to get a sense of the health of your business. Your bottom line will tell you if your business is creating profit but that might not be the whole story. Was your goal for the last 12 months to gain market share? Was your goal to grow one source of your income over another? This report will give you a sense of how you’ve accomplished those goals and what it took to get there.

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