A profit and loss statement answers one question: how much did the business earn in a given period. It starts with all the money that came in, subtracts what it cost to earn it in a fixed order, and arrives at the bottom line. A self-employed person attaches it to the annual return, and a bank or investor will want to see it before a loan or an investment.
A full example, for a design studio over one year, in amounts before VAT:
| Line | Amount |
|---|---|
| Revenue from sales and services | ILS 420,000 |
| Cost of sales: printing and subcontractors | ILS 120,000 |
| Gross profit | ILS 300,000 |
| General and administrative: rent, software, telecom | ILS 54,000 |
| Sales and marketing | ILS 18,000 |
| Depreciation on computers and equipment | ILS 6,000 |
| Operating profit | ILS 222,000 |
| Financing: bank and card processing fees | ILS 4,000 |
| Profit before tax | ILS 218,000 |
The last line is the base from which income tax and national insurance are calculated, after adjustments the accountant makes under the law.
The lines, from top to bottom
Revenue opens the statement. It is every amount the business owes tax on for the period, before VAT. A business keeping single-entry books usually records income when the money arrives, and one on double entry records it when it arises, even if it has not been paid yet.
Cost of sales comes right after. It is the direct cost of what you sold: goods you bought, raw materials, a subcontractor who did part of the work. For a service provider working alone it is sometimes close to zero.
The gap between the two is gross profit. It shows how much of each shekel of sales is left before paying for keeping the business running.
Then come operating expenses: rent, software, phone, bookkeeping, advertising, travel. Only deductible expenses go in here, and some are recognized only in part, such as a car or a mobile phone. Equipment used over several years does not go in as one expense but as annual depreciation.
After operating expenses you reach operating profit. Below it go financing costs, such as loan interest, bank fees and card processing fees, which leads to profit before tax.
What goes to the Tax Authority
A self-employed person filing a full annual return on form 1301 attaches the profit and loss statement on form 1320, appendix A to the return. The Tax Authority also accepts a report produced by approved software in place of the form, which is what most accountants file.
The form does not ask for every receipt. It asks for totals by category: turnover, cost of sales, and each group of expenses separately. You keep the documents behind each total, because an audit will ask for them. How long you must keep them is covered in the document retention guide.
For an osek patur and an osek zair
An osek patur charges no VAT, but for income tax they are self-employed like anyone else. If they file a full annual return, they attach a profit and loss statement, and the only difference is that it has no VAT lines.
In the osek zair track the picture is different. There expenses are not counted at all: you report turnover, and 30 percent of it is deducted automatically as expenses. So someone in that track files a short report rather than a profit and loss statement.
Profit before tax is not what you keep
The bottom line is profit before tax, and income tax, national insurance and health tax still come off it. A self-employed person with ILS 218,000 of profit a year does not take home ILS 218,000. What actually remains is shown by the net income calculator for the self-employed, which applies this year's brackets.
Profit is also not the same as money in the bank. Income recorded but not yet paid, equipment bought in cash and recorded as depreciation, or a loan received all move the bank balance without changing profit by the same amount.
Building it during the year
The easy way to have the statement at year end is not to build it at year end. Every income is backed by an invoice or receipt that was issued, and every expense by an invoice that was kept. When the documents are organized by month and expense type, the statement is a sum of columns.
In Slate the year's income is totalled by month from the documents you issued, and expenses are kept by type. At year end the accountant gets both sides ready, not a bag of receipts.
This is general information, not tax advice. For a specific case, talk to an accountant or tax adviser.
Common questions
What is a profit and loss statement?
A summary of a business's income and expenses for a period, usually a year, showing how much it earned or lost. It starts with income, subtracts costs in a fixed order, and ends with profit before tax.
Does a self-employed person have to file one?
A self-employed person filing a full annual return attaches a profit and loss statement, on form 1320, which is an appendix to form 1301, or as a report from approved software. Someone in the osek zair track files a short report on turnover only.
What is the difference between gross profit and net profit?
Gross profit is income minus the direct cost of what was sold. Net profit is what is left after all expenses, including rent, marketing, depreciation and financing, and sometimes after tax too.
Does an osek patur need one?
Yes, if they file a full annual return. VAT status does not change income tax reporting, and an osek patur calculates profit exactly like an osek murshe, just without VAT lines.
Who prepares the statement?
In most businesses the accountant, from the year's bookkeeping. A small business with few expenses can prepare it itself, as long as every income and expense is backed by a document.