Posted on Mar 25, 2014
Financial Statements Made Simple
Income Statements 101
Part 1 of 3
How did your small business do last month?
Did you have a Net Income or a Net Loss?
If you don’t have an answer to that question, you should.
Keeping score is one of the many responsibilities that go with running a small business. A review of your company’s Balance Sheet and Income Statement should be on your “To Do” list every month.
We’ve already introduced you to the information provided on a Balance Sheet so, let’s see what we can learn about the Income Statement.
An Income Statement by any other name is still an Income Statement….
This report that can go by many different titles, so don’t get confused. You may see it called a Profit and Loss Statement, a Statement of Earnings, a Statement of Operations, an Earnings Report, a Revenue Statement….
Regardless of the fancy title, they all show the same thing….DID YOU MAKE ANY MONEY?
In other words….WERE YOU PROFITABLE?
Finally, onto the good stuff!!
Not so fast! Once again, a little background first….
If you recall, a Balance Sheet will show your business’ financial position at a particular point in time, like a picture taken with your camera.
An Income Statement on the other hand, will show your position over a period of time. So, think of it as a movie….the camera starts to roll….
The director yells ”ACTION!!!”
And, you keep rolling until you get to the end of the period; this could be a week, a month, a quarter, or a year.
When you’re ready to start the next period, you start from scratch (with zero balances) and record until the end of that period, and so on….
Income Statements show Revenue and Expenses. (Revenue accounts can also be referred to as Sales or Income accounts, we will use all these terms throughout this series). Revenues are the dollars you earned; Expenses show how much it cost to earn those dollars.
A business is profitable when revenues are higher than expenses; this means you have a Net Income (Yay!!). When the opposite happens you end up with a Net Loss (Uh-oh).
There are two common formats that can be used when preparing an income statement.
The first format is the most basic; it’s called a single-step income statement. It arrives at the Net Income or Net Loss total by performing one subtraction; total revenues minus total expenses. Simple stuff.
The second format (the one we’ll be using in this series) is the multi-step format; it provides more detail by dividing revenue and expense accounts into sub-categories. It performs multiple subtractions to arrive at the Net Income or Net Loss.
Regardless of what format you choose, the end result is the same.
DID YOU MAKE ANY MONEY?
Are you seeing a pattern here?!!
So, once again, how did your small business do last month?
Look for two more articles explaining the Revenue and Expense sections in greater detail.
A Profitable Boss = A HappyBoss