Accounting 101: Profit & Loss Statement

Have you ever heard of P&L?



As the name says it is the statement showing one's Profit or/and Loss. It is a summary of one's significant sources of income and expenses. Others call it Earnings & Expenses statement due to the fact that it shows such details.

Now why such statement is important? This statement is important because it guides us regarding a business performance. When this report shows a profit it means that the business is in good shape but if it shows losses one must take a look into it to determine which areas causes such loss or one eventually consider closing the business to avoid further losses.

As the name says it shows the details of earnings & expenses. Categorizing or classifying earnings & expenses helps us make decision on where to focus our attention. If one knows the symptom one can easily make necessary actions to fix the problem. So as with this statement. If some expenses have become large but are actually unnecessary the owners can either cut it down or totally stop spending on such.

The basic equation for profit or loss is below:

Earnings - Expenses = Profit(if positive)/Loss(if negative)

By this equation alone one can analyze that:

- to make profit or avoid losses one must have higher earnings than expenses
- when earnings is at its highest limit(that is one has reached the maximum
earnings possible) the only way to raised profit is to cut on expenses
- to realize maximize profits one must increase earnings & cut expenses

Accounting 101: Balance Sheet Equation

Before we go further with QuickBooks lets discuss one of the guiding principles of Accounting.


Balance Sheet Equation

ASSETS = LIABILITIES + CAPITAL

Understanding this equation will guide you in recording transactions in accounting and in using QuickBooks. But first let us be clear on the components of the equation. I am sure you have read Robert Kiyosaki's Rich Dad;Poor Dad and one of his topic is regarding classifying things to Asset or Liability. Before we go further lets define these terms according to Accounting.

ASSET Things that are resources owned by a company and which have future economic value that can be measured and can be expressed in dollars. Examples include cash, investments, accounts receivable, inventory, supplies, land, buildings,equipment, and vehicles.

LIABILITIESObligations of a company or organization. Amounts owed to lenders and suppliers. Liabilities often have the word "payable" in the account title. Liabilities also include amounts received in advance for a future sale or for a future service to be performed

CAPITALA reference to stockholders'/Owners' equity. It is the net amount invested by the owners or the amount that is attributable to the owners or in other words the owners' part in the whole company.


The equation is just like any algebraic equation. Thus when there is an increase/decrease in asset there should be an equal increase on either liabilities or Capital to keep the equation balance thus the name BALANCE SHEET.

In a way it is a checking mechanism if you are recording transactions. If there is an imbalance in this equation one must be aware because it means there is wrong or erroneous recording of transaction thus the term "Your books is out of balance."

The same equation is the very reason why accountants use a Double Entry Bookkeeping system.

Quickbooks Mainpage

Above is Quickbooks' usual homepage.

It has five areas for the Workflows and a sidebar for account balances and other tools.

This graphical division guides you to the particular step by step accounting task.

When entering your bills for purchases and expenses use the Supplier workflow.

When billing your clients or customers go to Customer workflow.

For payrolls and employee related documentations choose Employee.

For Chart of accounts and inventory details go to Company.

And lastly when writing a check to pay your purchases go to Banking.

Why Quickbooks?

I have been using Quickbooks Enterprise for more that a year now in my brother-in-law's company here in Guam. As an accountant, it is always convenient to have a software to keep track on your records and not resort to the old style journal and ledger books.

My three and a half work experience in Orica Philippines exposed me to a high end ERP software like SAP. It is one of the great software specially designed for manufacturing/multinational company where operations is worldwide and synchronization is a must. The likes of SAP is the one that any big companies engage in a multifaceted operation; but for small and medium size organization I welcome you to Quickbooks.

Quickbooks is user-friendly. It doesn't require a lot of accounting knowledge and it is easy to learn. It has this graphical step by step process that will guide you in your business recording. From here on I will be dispensing all the knowledge and experiences I have gained as I use this software in my profession and work.