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How do I Know if My Profit and Loss Report (Income Statement) is Correct?

Profit and loss

This is something we get asked quite a lot – normally because people don’t recognise the numbers that they are seeing.  Here is a quick list of things to check to decide whether your accounting data is up to date and populating the profit and loss reports (income statements) correctly.

  1. Are all bank reconciliations done? Not just the ‘normal’ accounts but also credit card accounts, Amazon, Paypal and merchant accounts such as Sagepay and Stripe.  It is easy to overlook fees that have been charged without an invoice, payments that have been made without a receipt, or recurring bills that you’ve forgotten about.
  2. Have all sales orders and credits been invoiced? Unless they are invoiced then they won’t appear on the profit and loss or income statement.   This is also one of the reasons why the profit and loss / income statement looks different to the sales reports – see our earlier blog here!
  3. Have sales orders been despatched for stock tracked items? For the ‘cost of sale’ to be correct in the profit and loss / income statement then the sales orders need to be marked as despatched.  If they haven’t been despatched, then the profit will appear too high.
  4. Have supplier invoices been entered for non-stock tracked items and for any delivery costs? And are the dates on those invoices in the same month as the sale was made?  As for point 3 above, the cost of the sale needs to be recorded in the same period as the sale itself to get an accurate profit figure.
  5. If you employ staff, has the payroll journal been entered? This needs to be done each time there is a payroll run but can often be missed.  Check that the salaries / wages figures look correct.
  6. Have all accounting adjustments such as prepayments, accruals and depreciation been made? It is best practice for things that are paid annually or quarterly to have the cost evenly spread across the year.  For example a rent payment of £3,000 for a quarter should appear as an expense of £1,000 for each of the 3 months rather than an expense of £3,000 in one month and nothing in the other 2 months.  Depreciation (which is the writing down in value of fixed assets) should also be done on a month by month basis rather than once a year to give an accurate profit and loss position.
  7. Finally – check across previous periods for consistency. Have a look at the current period compared to previous periods.  Are sales, cost of sales and expenses consistent between the periods?  And if not, are you happy that the differences are correct?

If you’re still having problems and would like some help, just contact us – we’d love to help!

 

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