Notes on tax prep and the profit and loss statement

Editor’s note: Michelle Stockman works with Little Rock-based Arkansas Capital Corp. to promote entrepreneurship development around the state. Stockman earned a bachelor’s degree from Loyola University-Chicago in communications and fine arts, and earned a master’s in entrepreneurship from Western Carolina University. Her thoughts on business success appear each Monday on The City Wire.

TAX TIME
Tax season is upon all of us, as we gather receipts, charitable donations and scrounge around for tax forms. Business owners can save themselves (and their tax preparers) time by being prepared with the information that is needed for Uncle Sam.

To start, keeping electronic financial files through Quickbooks, Quicken or with an accountant will help you prepare year end profit and loss statements, track expenses and calculate additional information to assist you with assessing your assets.

Secondly, it is important for businesses to keep paper invoices, receipts and notes in an organized file. While the detailed files may not be needed by your accountant, keeping them orderly is a good habit to get into in case those files are needed at some point.

Lastly, talk with your accountant or tax preparer prior to starting your business and prior to the tax season to see what you will need to track over the year to make the preparation of your taxes relatively easy. Laws change regularly, so don’t rely on information that was given to you one year over the next.

PROFIT & LOSSES
Financial information and record keeping is often an enigma for most business owners. To most, a profit and loss statement is a page of numbers that may as well be written in a foreign language.

Understanding the profit and loss statement is not as difficult as it may appear. In fact, the financial statement often becomes a story to the business owner who takes the needed time to understand the information presented in front of them.

The profit and loss statement is comprised of three sections of information, which include revenue, expenses and gross profit. When you look at the three categories, you can quickly see how much money the company is making, how much it costs to operate and whether the company is profitable or not.

The three categories are further examined with a few additional lines of information. In examining the revenue input into the company, subtract the amount it costs for the company to sell the product (Cost of Goods) and you  will obtain the gross revenue brought into the company through sales.

Expenses should be broken down by the category in which they reside. General and Administrative (office supplies, administrative staff, etc.), Research and Development (new product development) and Marketing and Sales compose the three major categories that company’s spend their money. Adding all those expenses together equals the cost of operating the business.

Lastly, subtracting revenues from expenses will result in where the company lies financially. If you want to get technical, you then subtract taxes and interest expense from this number to obtain your true profit or loss number.