#income statement

Most new business owners do not think about financial statements until someone asks for one. A lender wants it. An investor wants it. Sometimes it is just tax season, and the accountant needs it.

If you are in your first year of business, you may not have prepared one before. That is normal.

This tutorial takes a thorough look at the entire procedure, explaining each aspect with simple language and real-life figures.

What You See When You See a Profit and Loss Statement

A profit and loss statement, also known as a P&L, includes your earnings and expenses during a certain time frame. In other words, what you gain or lose can be found on the last line of the document.

You may hear this report referred to as an income statement. They mean one and the same thing, although one name may be used more often than another depending on who will read it. A formal report that goes to the bank or investors may opt for the second term, while regular business communication would prefer the first. More details about this topic can be found in this P&L statement tutorial.

For your first year, this report matters more than most people expect. It is often the first real proof of whether your business idea works on paper, not just in your head.

Why the First-Year P&L Is Different

A first-year P&L usually looks messier than later ones. Revenue may be inconsistent. Expenses can include one-time setup costs that will not repeat next year, such as incorporation fees or initial equipment purchases.

According to the U.S. Small Business Administration, new business owners should track both one-time startup costs and ongoing monthly expenses separately before estimating profitability, since lumping them together makes it harder to see the real operating picture once the business stabilizes.

Spending patterns in year one also tends to run higher relative to revenue than in later years. Data compiled by Bankrate and Shopify puts average first year spending for a small business around $40,000, though the range varies enormously based on industry, location, and whether the business has employees.

Knowing this going in helps you read your own P&L without panicking over a loss in the early months.

Step 1: Choose Your Reporting Period

Decide whether you want a monthly, quarterly, or annual P&L. Most new businesses benefit from preparing one every month during the first year. Monthly reports catch problems early, before they grow into bigger ones.

By the end of the year, you can combine the twelve-monthly reports into one annual P&L for tax filing or for investors who want a full year view.

Step 2: Pick Cash Basis or Accrual Basis

This decision affects how you record revenue and expenses.

Cash basis records income when you actually receive payment and expenses when you actually pay them.

Accrual basis records income when you earn it and expenses when you incur them, regardless of when the cash moves.

Cash basis is simpler and is commonly used by small businesses and sole proprietors. The IRS generally allows small businesses to choose either method, though accrual accounting becomes mandatory once a corporation's average gross receipts cross a set threshold set by the IRS.

If your business sells credit, carries inventory, or has a noticeable gap between doing the work and getting paid, accrual accounting will give you a more accurate read on actual performance. If you are a freelancer or service provider getting paid close to when you do the work, cash basis is usually easier to manage.

Step 3: Gather Your Revenue Numbers

Pull together every dollar your business brought in during the period. This includes:

Sales of products or services

Returns or refunds, which should be subtracted from total sales

Any other operating income tied to your core business activity

Do not include loans, owner contributions, or investment funding here. That money came into the business, but it is not revenue. Mixing it in will make your P&L misleading.

Step 4: Calculate Cost of Goods Sold

If you sell a physical product, this step matters a lot. Cost of goods sold, or COGS, covers what it directly cost you to produce or acquire what you sold. This usually includes raw materials, packaging, and direct labor tied to production.

Service businesses often have little or no COGS, since there is no physical product changing hands. If that is your situation, you can move straight to operating expenses.

Subtract COGS from revenue to get gross profit. This number tells you whether your core offering is profitable before your account for rent, software, or other overhead.

Step 5: List Your Operating Expenses

Operating expenses are the regular costs of keeping the business running. In the first year of P&L, this list tends to be longer than expected. Common categories include:

Rent or coworking space

Software subscriptions

Marketing and advertising

Insurance

Professional fees, such as legal or accounting help

Utilities and office supplies

The Small Business Administration recommends listing at least fifteen to twenty individual line items when building out a first-year budget, since vague categories like "miscellaneous" tend to hide real spending patterns. The same logic applies once you are tracking actual expenses on P&L. Specific categories make it easier to spot where money is going.

Step 6: Subtract Expenses to Find Net Income

Once revenue, COGS, and operating expenses are in place, the math is straightforward.

Gross Profit - Operating Expenses = Operating Income

From there, factor in anything outside normal operations, such as interest paid on a business loan or one-time gains. What is left after all of that is your net income, also called the bottom line.

If the number is positive, you made a profit for the period. If it is negative, you have a loss. Neither outcome is unusual in a first-year report, especially in the early months before revenue catches up to spending.

Common Mistakes First Time Business Owners Make

A few patterns show up again in early P&L statements.

Treating revenue as if it were profit is the most frequent one. High sales numbers feel good, but they do not mean much until expenses are subtracted. A business can have strong sales and still lose money if costs are not under control.

Another common mistake is forgetting to separate one-time startup costs from ongoing monthly expenses. Lumping them together makes it harder to judge whether the business model itself is sustainable once the initial setup spending is gone.

Some owners also skip months when revenue was low, hoping to avoid looking at the numbers. This is the opposite of what should happen. Slow months usually contain the most useful information about where the business needs adjustment.

Reading Your First-Year P&L Without Overreacting

A loss in month two does not mean the business is failing. A profit in month seven does not guarantee it will continue. The real value of a P&L comes from watching the trend across several months, not reacting to any single number.

Compare each month against the one before it. Are expenses leveling off as one-time setup costs fade? Is revenue growing, staying flat, or declining? These patterns tell you more than any individual month ever will.

If you want to understand how a P&L fits alongside other financial reports, this overview of financial statements explains how income statements, balance sheets, and cash flow statements work together to show the full financial picture of a business.

Bottom Line

Preparing a profit and loss statement in your first year is less about accounting precision and more about building a habit. The format doesn’t necessarily have to be flashy. The key is consistency and accuracy in the categories and, perhaps more importantly, having the ability to analyze the figures regardless of whether they are disappointing or not.

Once you complete a year of P&L’s, you’ll have something that few new entrepreneurs ever see a true factual accounting of their business performance, independent of subjective feelings month by month.

As a startup founder, maintaining accurate financial records is crucial to the well-being of your business. While the task of financial record keeping may not be at the top of your to-do list, it is an essential aspect of running a successful business and cannot be neglected. 

Financial records can tell you whether your startup is doing well or requires fine-tuning in its operations. The absence of proper financial records could hinder your plans for the future as prospective investors would be unwilling to place their bets on a firm that is unable to show tangible results.

Given the need for accurate financial records for your startup, we discuss a few of the most essential records.

Crucial financial records to be maintained

1. Income statement

The income statement sums up your startup’s total income and expenditure for a certain period. It informs you about whether your startup is making a profit or running a loss during that period. Hence it is also referred to as a profit and loss statement. The income statement helps you track the financial performance of your startup. You can also use it to identify areas of growth and course correction. Generally, you draw up an income statement either at the end of a month, quarter, or year.

2. Balance sheet

The Balance Sheet summarizes your startup’s financial condition. It informs you about your capital, assets, and liabilities, essentially providing an overall business assessment. The balance sheet is another financial record that provides valuable insights into your startup’s financial standing and liquidity position. It is generally prepared quarterly or annually.

3. Cash flow statement

A cash flow statement tells you about cash movement to and from your startup for a specific period. It helps you keep a check on your cash position and ensures you do not run short of cash to operate your startup. You can use a cash flow statement to calculate your burn rate, which is how fast you spend your cash reserves, and runway, which indicates how long your startup has before it runs out of cash. Important components of the cash flow statement include;

Cash expended on investing activities

Cash expended on operating activities

Cash expended on financing activities

Cash expended on discretionary items

Net cash income

4. Accounts payable and receivable

The accounts payable record denotes the amount your startup owes to other businesses. The account consists of amounts you must pay your creditors for services or goods received on credit. This amount will be displayed under your current liabilities on your balance sheet.

On the other hand, the accounts receivable record denotes the sum your startup has yet to receive from companies for goods or services you provided them. The accounts receivable is an asset for your startup and will appear in your balance sheet as a current asset.

5. General ledger

The general ledger is a record of all your startup’s financial accounts. It includes accounts of the assets, liabilities, incomes, expenses, equity holdings, etc. of your startup. The general ledger forms the basis of all the accounting for your firm. All your accounting reports, such as the balance sheet and income and expenditure statement, are drawn up based on the accounts maintained in your startup’s general ledger.

These are the crucial records your startup must maintain so that you can monitor its financial condition and assess its profitability.

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