Understanding Your Reporting
What is included on your Profit and Loss Statement?
The Profit and Loss (P&L) report summarizes your business activity for a specific time frame—such as a month, a quarter, or a full year.
It lists your total revenue (income from sales) and your expenses for that same period, then shows the bottom line: revenue minus expenses.
What counts as revenue (and what doesn’t)
Revenue (also called income) is money your business earns from selling services or products.
Not revenue: Cash from loans, credit card advances, or owner/investor contributions. Even though those funds hit your bank, they are not “income.”
Where those go instead: Loans and investments are recorded on the Balance Sheet, not on the P&L.
Expenses at a glance
The P&L shows your expenses grouped into categories and subtracts them from revenue.
The bottom line (often called net profit or net income) is simply:
Revenue – Expenses = Profit (or Loss)
Two expense types you’ll see
Cost of Goods Sold (COGS)
What it means: Direct costs required to deliver your service or product. These costs typically rise and fall as your sales change.
When it applies: If a cost is tied to a specific client project, fulfillment, or unit sold, it’s often COGS.
Examples:
Product-based businesses: Inventory purchases, raw materials, packaging, production labor, shipping to customers.
Service-based businesses: Subcontractor payments tied to a client project, software seat used only for a client deliverable, credit card processing fees on sales, printing for a client’s order, specialized supplies consumed in service delivery.
Operating (Overhead) Expenses
What it means: Ongoing costs to run the business whether or not you make a sale that day.
When it applies: General support of your business operations—not tied to one specific sale.
Examples:
Rent, utilities, internet
Team/admin salaries not tied to specific projects
General software subscriptions (email, CRM, bookkeeping)
Marketing and advertising
Office supplies, postage
Professional services (legal, accounting)
Insurance, licenses, dues
Education and training
#How COGS vs. Overhead affects your margins
Gross Profit = Revenue – COGS
Net Profit = Gross Profit – Overhead Expenses
Why it matters: Classifying costs correctly helps you understand how profitable your deliveries are (gross margin) and how efficiently you’re running the business overall (net margin).
Quick example
If you earned $10,000 in service revenue this month and had $2,000 of COGS (subcontractors tied to client projects and payment processing fees), your gross profit is $8,000.
If your overhead for the month was $5,500 (rent, software, admin payroll, etc.), your net profit is $2,500.
Where the Balance Sheet fits in
The Balance Sheet is a snapshot of what your business owns and owes at a point in time.
It includes:
Assets: Cash, accounts receivable, equipment, inventory
Liabilities: Loans, credit cards, taxes payable
Equity: Owner contributions, retained earnings
This is where loans and owner/investor funds live—not on the P&L.
Common questions we get
“Why is my bank balance higher than my P&L profit?” Because the P&L excludes loan proceeds and owner contributions (those are Balance Sheet), and it’s based on income/expense activity, not just cash in the bank.
“Why did my profit drop even though sales went up?” Often COGS or overhead rose faster than revenue, or expenses were misclassified. We review this with you in quarterly calls.
Pro tip: Make the P&L report more useful
Change the date range: Use the Report period filter to view a month, quarter, year, or custom dates.
See trends by month or quarter: Set a long range (e.g., This Fiscal Year), then use the “Totals only” dropdown to switch to “Months” or “Quarters.” This adds definition and helps spot patterns.
Drill into the details: Click any number on the report to see the transactions behind it. From that list, you can click a line to open the actual transaction.
Edit carefully: It’s okay to fix a category or add a memo/attachment after drilling in. Do not change the transaction amount—changing amounts can break your bank balance and reconciliations.
What is included on your Balance Sheet?
What a Balance Sheet Report Shows
The Balance Sheet is a snapshot of your business “as of” a specific date (for example, as of December 31 or as of June 30).
It lists what your business owns (assets), what it owes (liabilities), and the owner’s equity. At its core:
-Assets = Liabilities + Equity
Date matters
Unlike the Profit and Loss report (which covers a period, like a month or year), the Balance Sheet shows your balances at one point in time—as of the end date you choose.
What’s in Assets (what you own)
Cash and bank accounts: Checking, savings, PayPal/Stripe balances
Accounts receivable: Invoices you’ve sent that haven’t been paid yet
Inventory: Items you plan to sell
Prepaid expenses: Paid in advance (insurance, rent)
Fixed assets: Equipment, computers, furniture (recorded at cost, less depreciation)
What’s in Liabilities (what you owe)
Credit cards and lines of credit
Loans and notes payable (including PPP/EIDL if applicable)
Sales tax payable and other taxes due
Accounts payable: Bills you owe vendors
What’s in Equity (your ownership)
Owner’s equity/capital: Your investment in the business
Owner’s draw/distributions: Money you’ve taken out for personal use (more below)
Retained earnings: Cumulative profit the business has kept over time
Retained earnings (plain-English)
Retained earnings is the running total of past profits (and losses) that stayed in the business after prior years.
Simple example:
-Year 1 net profit: $8,000 → retained earnings becomes $8,000
-Year 2 net loss: $(2,000) → retained earnings becomes $6,000
-Year 3 net profit: $4,000 → retained earnings becomes $10,000
Owner’s draw vs. payroll (and where it shows up)
Owner’s draw (for sole proprietors/LLCs not taxed as S-Corp):
-When you transfer money from the business to yourself, it’s usually recorded as an owner’s draw.
-Important: Draws do not appear on the Profit and Loss; they live on the Balance Sheet in equity.
-Draw amounts are cumulative across all dates—think of it as a running total of everything you’ve taken out over time.
Owner payroll (for S-Corps and most corporations):
-It’s common for owners to be on payroll.
-Payroll expenses (wages, payroll taxes) show on the Profit and Loss because they are business expenses for that period.
Common questions we get
“Why don’t my owner withdrawals show up on the P&L?”
-Because owner’s draws are equity transactions, not expenses. They appear on the Balance Sheet, not the Profit and Loss.
“If I’m an S-Corp owner on payroll, where is that shown?”
-Owner wages and payroll taxes are on the Profit and Loss as operating expenses, just like other employee payroll.
“Why does my Balance Sheet show a big retained earnings number?”
-That’s the cumulative total of prior years’ profits (minus losses). It’s normal for…?
Credit Card Payments & Bank Transfers
When you move money between your own business accounts—like transferring funds from checking to savings, or making a payment from your checking account to your business credit card—these transactions aren’t income or expenses. Instead, they’re considered transfers and only impact your balance sheet, not your profit and loss statement.
Key Points:
-Payments from checking to credit card, or transfers between business accounts, are not “spending” or “earning”—they’re just moving money within your business.
-These transactions reduce one account’s balance and increase another, but don’t show up as income or expenses on your P&L.
-If these transfers get accidentally categorized as expenses or income, your reports can look off (for example, a sudden spike in expenses).
Good to Know:
If you ever notice a strange jump in your profit and loss report, double-check that transfers weren’t incorrectly marked as expenses or income. Keeping transfers categorized correctly helps ensure your financial reports are accurate and easy to understand.
Joy's Tips and Tricks
Connecting Bank Accounts (Bank Feed) in QBO
Connect all business bank and credit card accounts to the Bank Transactions tab (Bank Feed) in QuickBooks Online so that cleared transactions flow in for review and categorization.
What to connect
Business checking and savings accounts
Business credit cards
We recommend connecting the account itself instead of connecting individual cards as separate registers
Do not connect personal accounts
Side tip: Keep business and personal separate
Maintain separate bank/credit accounts for the business.
If a personal charge accidentally hits the business card, categorize it as Owner’s Draw/Distribution (not an expense).
How to connect (high level)
Open QuickBooks Online > Transactions (or Banking) > Bank Transactions tab.
Search/select your bank.
Enter your online banking credentials and complete any multi-factor prompts.
Choose the accounts to connect and set the correct start date (see below).
Confirm; QBO will begin pulling transactions into For review.
Set the correct start date
Existing bank account you’ve used: Set the start date to on/before the first day you want included (e.g., if the card was first used on Aug 5, select Aug 1 or earlier).
New QuickBooks file (not importing prior years): Use the first day of the current year (e.g., Jan 1).
Brand-new bank account: Connect from the account’s opening date.
NOTE: QuickBooks usually pulls several months of past activity. If your start date is far back, it may not bring everything. If you notice older transactions missing, reach out to us and we’ll help add any gaps correctly.
Account Naming
When QBO creates the account in your Chart of Accounts, it will suggest a default name (e.g., “Checking”). You can rename it later to something clearer (e.g., “Chase Checking – Operations”).
Important: Replacing an old bank account
If you close an old account and open a new one with a different account number, connect it as a brand-new account in QBO.
Do not link the new bank login to the old register—this causes mismatches and duplicate history.
If Your Bank Disconnects — How to Reconnect Safely
What you’ll see
In the Bank Transactions tab, QuickBooks will show an error on the affected account and a “Fix now” link.
If you close an old account and open a new one with a different account number, connect it as a brand-new account in QBO.
Do this (reconnect the existing feed)
Click Fix now.
A popup will open—re-enter your bank credentials and complete any MFA prompts.
QuickBooks will reconnect to the same existing feed and resume pulling transactions into For review. In the Bank Transactions tab, QuickBooks will show an error on the affected account and a “Fix now” link.
If you close an old account and open a new one with a different account number, connect it as a brand-new account in QBO.
Do not do this
Do not click “Connect bank account” to add the bank again.
Do not create a new account/register in the Chart of Accounts.
Doing either will duplicate the entire register and create a mess of duplicates.
Reimbursements to Employees/Contractors
Reimbursements — Standard Process (Simple and Correct)
What this is
When an employee or contractor pays a business expense with their personal funds and the business pays them back.
The rule of thumb
Do not categorize reimbursements as “Wages,” “Contractor Payments,” or a generic “Reimbursements” account.
Do categorize the payment to the original business expense category (e.g., Office Supplies, Software, Meals).
Why this matters
Keeps your Profit and Loss accurate by expense type.
Avoids payroll/1099 issues—reimbursements are not income to the person you’re paying back.
How to handle reimbursements in QuickBooks Online (standard method)
When the reimbursement payment clears the bank and appears in the Bank Feed:
Go to Banking/Transactions > For review.
Select the reimbursement payment to the person you reimbursed.
Click Split if it covers multiple purchases; otherwise choose one category.
Categorize each line to the correct expense category (e.g., Office Supplies, Software, Meals).
Add a clear memo (e.g., “Reimb to Taylor – USPS postage 2025-09-01”).
Attach the receipt(s) to the transaction if available.
Add/Save.
Examples
You reimbursed a contractor $65 for printer ink → Categorize to Office Supplies $65 (not Contractor Expense).
You reimbursed an employee $84 for a client lunch → Categorize to Meals $84 with a memo noting the business purpose and attendees.
Common mistakes to avoid
Choosing Payroll/Wages or Contractor Expense—this can inflate payroll costs and 1099 totals.
Using a catch-all “Reimbursements” category—you’ll lose visibility by expense type.
Forgetting to Split when one payment covers multiple items (e.g., $45 supplies + $20 parking).
Quick tips
Always rely on the Bank Feed (For review) to categorize these—avoid manual register entries.
Attach receipts and include who/what/when/why in the memo for a clean audit trail.
If you’re unsure which expense category to use, leave it uncategorized and we’ll tag in with the right one.
What are Reconciliations
General info on Reconciliations - https://youtube.com/shorts/F_szPZMsFUU
Spoiler Alert: We don’t recommend DIY reconciliations
This isn’t a sales pitch (Scout’s honor!)—it’s a quality control safeguard. Reconciling requires context and judgment (e.g., transfers vs. expenses, timing of deposits/refunds).
Small mistakes compound over time, making later cleanup harder and more expensive.
What you can expect from a professional reconciliation
Bank and credit card statements matched to QBO balances
Investigation of uncleared items, transfers, and potential duplicates
Notes on unusual activity and any documents needed to finalize the month
QuickBooks Features to Question
QuickBooks Features That Might Not Be Worth Using
Some QBO features add complexity and increase the risk of duplicate entries or reporting errors. Here’s what to avoid (or use sparingly) and what to do instead.
Billable Expenses
Why to avoid: Easily creates duplicates (expense recorded once, then again when added to an invoice). Can misstate revenue/COGS and clutter A/R.
Hidden trap: Time/expense marked “billable” can auto-attach to invoices later—even if already billed another way.
Better approach: Create the invoice yourself with clear line items. Keep expenses categorized normally; use memos/attachments for backup instead of billable flags.
Inventory
Why to avoid: True inventory requires item setup, purchase vs. sales flow, and perpetual counts. Missteps affect both P&L and Balance Sheet (inventory asset, COGS, shrinkage).
Hidden trap: Partial setups lead to out-of-balance inventory and wrong COGS.
Better approach: If you only have occasional product costs, treat them as non-inventory items or simple COGS. If you truly need inventory tracking, consider a dedicated tool that integrates with QBO.
Time Tracking (inside QuickBooks)
Why to avoid: Not a strong time tool, and linking time entries to “billable expenses” is a common duplicate risk.
Hidden trap: Time pushed to invoices as billable + separate manual invoice lines = double billing or mismatched revenue.
Better approach: Use a dedicated time app (my favorite is Toggl Track) and build invoices directly with service lines—no billable flags.
QuickBooks Payroll
Why to avoid: Separate subscription and not best-in-class for payroll features/support.
Better approach: I recommend using Gusto for payroll. It’s purpose-built, reliable for filings, and integrates cleanly with QBO.
Classes, Locations, and Projects
Overview
These features add an extra layer to your bookkeeping so you can slice reports by program, place, or project. Use them when you want to compare parts of your business (not just the whole) and see profitability by segment.
Classes
What it is: A way to tag transactions by a segment of your business (program, service line, department).
When to use: You run multiple offerings under one company and want P&L by each offering.
Example: Interior design firm uses “Design Consults,” “Full-Service Design,” and “Sourcing.” Music business might use “Recording,” “Mixing,” “Live Events.”
What you’ll see: Class-based Profit & Loss and comparative insights across segments.
Locations
What it is: Tags for physical places or distinct business units (often retail or multi-location operations).
When to use: You have multiple stores, studios, or regions and want to see performance by location.
Example: “Nashville – West,” “Nashville – East,” “Online Store.”
What you’ll see: Location-based P&L to compare revenue, COGS, and expenses.
Projects
What it is: A project tracker that groups income, costs, time, and expenses for a specific job or event, with a dashboard and graphs for profitability.
When to use: You want job/event profitability for client engagements, productions, or events with clear start/end points.
Example: “Smith Residence Kitchen Remodel,” “Album Release: Summer Tour,” “Client Summit 2025.”
Note: Invoices must be created in a way that associates them with the project (QBO treats projects differently than simple tags). We’re keeping this section high-level here.
Choosing the right tool
Need job profitability? Use Projects.
Multiple offerings/programs? Use Classes.
Multiple physical sites? Use Locations.
Pro tips
Availability: Classes, Locations, and Projects are available on QuickBooks Online Plus (and Advanced). After upgrading, you must enable each feature in Settings to see the fields.
Setup: Keep names short and intuitive. Start with a small, clear list to avoid clutter.
***Consider before you adopt (consistency is a necessity)***
“All or nothing” in practice: Once you decide to use Classes, Locations, or Projects, you’ll have an extra field to manage on essentially every relevant transaction.
Data quality: Reports are only as good as your tagging. If tagging is inconsistent, your reports will be incomplete or misleading.
Alternative approach: If you don’t want to manage Classes/Locations/Projects, you can create specific income/expense subcategories tied to programs or projects (e.g., “Income – Workshops,” “COGS – Event Materials,” “Expense – Project ABC – Supplies”). This keeps reporting simple but won’t provide dashboards like Projects or side-by-side P&L by class/location.
Employees vs. Contractors
What should you consider when deciding between hiring a contractor or an employee (W2) for your business?
While we do not provide official advice on worker classification, here are some helpful things to keep in mind:
*Paperwork & Cost: Hiring an employee (W2) typically involves more paperwork and can be more costly than working with a contractor. Employees must be set up in payroll software to manage payments and tax filings.
*Payroll Software: We recommend Gusto for payroll. They offer a service to handle all tax paperwork on your behalf, which is worth the fee.
*Contractors: Contractors are responsible for setting aside their own taxes. Some employers choose to pay contractors a bit more to offset this, but the employer’s payroll tax obligations for employees usually make the costs balance out in the end.
*Bookkeeping: From a bookkeeping perspective, there isn’t much difference. Payroll software, such as Gusto, will automatically split transactions into separate categories for wages, taxes, and fees, making it easy to record everything accurately.
*Official Guidance: For legal or tax-specific advice on worker classification, it’s best to consult with a qualified professional.
If you have more questions or want to discuss your specific situation, we’re happy to connect you with trusted professionals who can offer further guidance.
What is Profit First?
Profit First Implementation
Instead of trying to navigate the implementation process blindly,
we've put together a 12 step process
with the primary goal of reducing disruptions along the way.
Step #1
Set up 3 new bank accounts (PROFIT, OWNER'S COMP, and TAXES)
https://www.loom.com/share/308de21a8a8e4fe7b281bd70ce9dad69?sid=a0d350a0-5ca1-43aa-8005-b2308a76f00b
Step #2
Start allocating all new revenue into the PROFIT, OWNER’S COMP, and TAXES accounts
Keep income and operating expenses in the original account for now; we will make this change next month
https://www.loom.com/share/05a366c875844c3387cf7cd43460cc55?sid=241acc48-331f-4fd0-a30d-c3cef1d37927
Step #3
Expense Analysis
https://www.loom.com/share/056b4bb7dc144fb4a797f22112b4220f?sid=6fc95285-2bef-44ce-96fc-eaa1e31ce1ff
Here is our template to help get you started with the Expense Analysis process - https://docs.google.com/spreadsheets/d/1l1Mz1FIs7S0FY7T43ybbqNIgf2tFw-r6Pj10NtjAov4/copy
Step #4
Start thinking through what additional bank accounts you might want to open
https://www.loom.com/share/943c2f3654934489b142e741d9a4434b?sid=e005d027-0caa-4313-918e-b9525e26e5ed
Step #5
Start Cutting Expenses
Step #6
Separate Income and Operating Expense Bank Accounts
Step #7
Open any additional Bank Accounts Wanted (Optional step, but please watch video before deciding)
https://www.loom.com/share/d84a577d36724506955f3f2cb2153332?sid=f79b98db-43fa-42ee-a968-81ab0052db99
Step #8
Start allocating all new revenue to ALL bank accounts on a regular schedule; prioritize this time
Step #9
IF you are switching over to an entirely new bank, make all of those changes this month
https://www.loom.com/share/07030f2694bd49c3ae7a07d22132dfe2?sid=b2f87127-e990-446e-a8bc-9c8acc8d3694
Step #10
Open the HOLD accounts at a separate bank and start adding this process to the allocation schedule
https://www.loom.com/share/300e956d9bad447bb12c930132823b1c?sid=b26a9414-a349-41d6-9fd1-4446f5751a66
Step #11
Cut expenses and Negotiate pricing/payment schedule with vendors
https://www.loom.com/share/3a640845d152471aa7cd7eed48c00820?sid=3f46500d-60ce-45c5-af32-b17d310a47b4
Step #12
Start playing with the numbers and making projections; discuss with Baker Bookkeeps team on the next call
https://www.loom.com/share/3808c95940e54c0f958819edaba12225?sid=5a5e8292-d2ec-4e09-9e3b-8d8c73d4ac3b
The Profit First App
*Anyone can get the Profit First app for a discount if they use my affiliate link - https://profitfirstapp.com/?via=joy
*Here's the youtube channel that PFP put together with how tos - https://www.youtube.com/@ProfitFirstApp
*PFA Chatbot – Login into PFA and go to the blue message icon at bottom right-hand corner of Dashboard. Be sure to use “AI Agent” for most inquiries.
*Email support – use these if the AI Agent couldn’t answer your question: Login to PFA, go to Chatbot and select “Send email inquiry” option. You will get response emails from [email protected].