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The income statement of any business is probably the most utilized report of all. It is a snapshot of the financial performance of your business over a period of time, such as a month or year. You might also hear it called the Profit and Loss Statement, or P&L.
The income statement can give you all kinds of insights as to whether you are bringing in enough sales, if your prices are generating enough profit, and how your expenses are running. Let’s take a look at the report, step by step.
Revenue
The report starts by listing the revenue for the period of time covered. Revenue includes all sources of income, including sales from operations and any other source of revenue. In most small businesses, sales will be the largest part of the revenue, if not all of it. In some countries, the term used for sales is turnover.
If you sell more than one item or have more than one location, it might be a good idea to be able to view the sales detail from these categories. This should not be detailed on your income statement, but you should be able to get a drill down report on your sales detail behind the scenes.
Look for exceptions to what you expect to see. There can be some decisions you can make and actions you can take from the insights you discover.
Cost of Goods Sold
This section of the income statement includes costs you incur directly on items you sell. If you maintain an inventory, it’s the cost you paid for the inventory items that you sold during the period. If your business is a manufacturer, cost of goods sold, or COGS, will include costs of materials and labor to produce the items.
If you’re in construction, COGS will be Materials, Labor, Subcontractor Expense, Equipment Rental, and General Conditions.
If you own a service business, COGS will typically be zero. As a service business, you may incur direct costs when providing services, and these costs can be booked in a variety of expense accounts, including supplies.
Gross Profit
Some income statement formats will include a gross profit number which is sales minus cost of goods sold. This number is important for businesses with inventory or job costing.
Expenses
The expenses section of the income statement is your company overhead. It includes all of the expenses you incurred in your business, including advertising and marketing, rent, telephone, and utilities, office supplies and meeting expenses, travel, meals, and entertainment, payroll and payroll taxes, and several more.
Other Income/Expenses
These are non-operational revenues and expenses. Other Income includes interest and investment income, revenue from insurance claims, and sales from assets or other parts of the business. Other Expenses include depreciation, amortization, interest expenses, and taxes.
To review your expenses, check line by line to see if anything looks out of sorts, and take the appropriate action.
Net Profit or Loss
The final number on your income statement represents whether you made or lost money in the period the report covers. The formula is simple: revenue less COGS less expenses plus other income less other expenses equals net profit or loss.
Net profit/loss can go by many names, depending on the size of your business and your accountant’s vernacular. You may also see EBITDA: Earnings before interest, taxes, depreciation, and amortization. Earnings is another word for net profit.
Perspective
It’s a good idea to compare your income statement numbers to other periods in your business. Common comparisons include last period, last several periods, and same period last year.
It’s also a great idea to have a Revenue Plan that sets goals for your income statement numbers. Then you can compare budget to actual numbers and take action on the variances.
If your business falls into a standard type of business, you may also be able to see how it is doing compared to others in your industry. This is called benchmarking, and the income statement is a very common format that’s used in benchmarking.
Do spend some time each period reviewing your business’s income statement. It can help you make a faster course correction in your business so you can be even more successful than you already are.
Please let us know if we can help with any of this!
The field of accounting has its own vocabulary, which can sound like a foreign language to some people. Your financial savvy will increase by learning a few new accounting terms. You’ll be “speaking accounting-ese” in no time, and you’ll become a smarter entrepreneur too.
Trial balance
A trial balance is an accounting report that simply lists the current balances of your accounts in your chart of accounts as of a certain date. It can also be called working trial balance. Another way to look at the trial balance is it’s a very informal version of a balance sheet.
Entity
Entity is a generic term for a company or organization. There are many types of entities: nonprofit, corporation, partnership, and sole proprietor.
Going concern
Going concern is an accounting principle. An entity is a going concern if it’s expected to continue operations in the near future.
Double entry
A double entry bookkeeping system means that when a transaction occurs, two accounts are impacted. For example, when an invoice is generated, entries are made to both the sales account and the accounts receivable account. It was invented in the 1400s and is widely used in modern accounting today.
Retained earnings
Retained earnings is an account in the equity section of the balance sheet. It’s the amount of earnings that is reinvested in the company after dividends are paid out. It’s computed by taking the retained earnings beginning balance, adding income or subtracting loss for the period, and subtracting any dividends paid.
Realization
A business transaction has many stages. It starts with an idea, may progress to a promise, then it actually happens. Accountants need to figure out when it becomes “real,” when to record it on the books. This is the concept of realization. A transaction is realized and put on the books when there is a contract, a legal obligation, an exchange of products or services, or an exchange of cash. There are many complicated principles and rules to help accountants determine this timing.
Cost principle
The cost principle is a foundational accounting principle. It means that when a transaction is booked, it is booked at cost and not market or current value. So even though an asset may have gained in value after you bought it, your books will still reflect the cost of the item, not the current value.
Client portal
A client portal is a software application where client files can be stored and retrieved securely. Both the accountant and the client have access to the portal.
Engagement letter
An engagement letter is the contract that defines the relationship between the client and the accountant. It is typically signed before the work starts and can be renewed once a year. It can also be changed if the scope of the work changes.
Matching
The matching principle is another basic accounting principle. It says that for any particular transaction, all aspects should be booked in the same accounting period. For example, let’s say you incurred expenses on an order in November. The order wasn’t delivered or invoiced until December. To meet the matching principle, the expenses should be deferred until December when they can be matched with the revenue that relates to the expenses.
Adjusting entry
An adjusting journal entry is made when account balances need to be corrected. An example is depreciation expense, which is typically booked with an adjusting entry. Accountants will make several adjusting entries like this at year-end.
Reversing entry
A reversing entry is a form of adjusting entry that is made in the period following an adjusting entry. It reverses the adjusting entry. One example of this is a cash basis taxpayer that is tracking accounts receivable. The accounts receivable balance is adjusted to zero prior to year-end and reversed on January 1.
How many terms did you already know? Now you can talk with your accountant about these concepts.
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Tax time is probably not your favorite time of year, especially if you have to pay the government your hard-earned dollars. Here are five tips on how we can make it just a bit less painful.
1. Have patience.
Practicing patience will go a long way when you’re dealing with taxes. Keep in mind that for tax professionals, the months of January through April are as crowded and hectic as a shopping mall in December.
Be patient with yourself as well. You have the skills to manage your business and do well in your career, but maybe not for organizing paperwork or dealing with numbers. That’s where we can help.
2. The tax stack.
Set aside a permanent place on your desk to be the tax stack. When you receive something in the mail that is tax-related, place it in the tax stack. You’ll save valuable time later not having to look for documents you need.
Similarly, create a folder on your computer for tax items. Under Documents, create a folder called Taxes. Within that folder, create a folder for the tax year, such as 2017 for the year just ended. Move all of your tax-related computer documents into that file.
At your leisure, scan in or take a cell phone picture of the paper documents in the tax stack and place the digital file in the Tax folder. Now you’ll have everything in one place and you’ll be so organized that your tax accountant will be surprised!
3. Catch up.
If your books or records are behind for 2017, get them caught up now to beat the rush. If you wait until the first week of April, you’ll probably need to file an extension. Keep in mind that an extension only grants a paperwork extension; it doesn’t delay any tax payments that are due. If you wait too late, you’ll have the stress of waiting until the last minute, the stress of paying estimated taxes, and the stress of waiting until your return is finally filed.
4. Early bird.
Connect with us or your tax professional early to agree on what services will be offered and to get your documents turned in as soon as you receive them. Getting your things in early will mean less waiting time for preparation and filing. Wouldn’t it be great to be able to say that you’re done with your taxes in February? Your stress will be less, and your energy can be redirected to new projects.
5. Avoid a large tax payment.
The worst thing about tax time might just be writing a big check, possibly with penalties, to the government in April. Instead, plan ahead and spread out your payments for next year by adjusting your payroll withholding or making quarterly estimated tax payments. Spreading your tax payment throughout the year will have you writing a smaller check, if any, in April.
Try these five tips for tax time, and you’ll have more energy for other, more important things in your business and your life.
Year-end is just around the corner, and that means a couple of administrative tasks are necessary to take care of bookkeeping and tax chores. Here are a couple of tips to make year-end go smoother.
Cleaning up
Things will go a lot smoother if you reach out to your vendors and employees and get their help to update your records.
- Send a notice to all employees, asking them to verify their address so they will get their W-2s without delay.
- Make sure you have the right information for vendors that you need to produce a 1099 for. Before you pay your vendors more than $600 in one year, ask them for a W-9 so that you have a current address and taxpayer ID number on file.
- Check to make sure you have any sales tax exemption certificates from vendors that you are not charging sales tax to.
It’s also time to clean up any account balances that need to be reclassified or corrected.
- Any clearing accounts, such as undeposited funds, should be zero.
- Bank reconciliations should be caught up and book balances should match the bank or be explained.
- Inventory should be adjusted to reflect accurate quantities.
- Loan balances should be adjusted to correctly reflect interest and principal allocations.
- Depreciation entries should be made.
Maximizing deductions
Here are a just a few ways to maximize deductions:
- Any bad debts that aren’t expected to be collected can be written off.
- Any inventory that is not saleable or worth less than you paid for it can be adjusted on your books.
- For cash basis taxpayers, pay any large bills before year-end if you have excess profits.
- Pay employee bonuses prior to year-end.
Getting organized
Create a place in your home or office or a special file on your computer to store tax-related documents, such as W-2s, brokerage statements, and tax returns. Convert them to PDF format if they are not already, and upload them to your accountant’s secure client portal as you get them.
With all this great preparation, you’ll find tax season easier than ever and a chore that you can mark off your to-do list early.
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Your “Chart of Accounts” is the list of accounts in your accounting software and forms the basis for all reports. It is the foundation of your accounting system. The accounts are listed in your reports, and the totals allow you to determine how much you’ve spent, made, own, or owe depending on the type of account.
It’s essential to create a list of accounts that you need in order to make better business decisions. Your chart of accounts needs to be designed intentionally. It needs to be short, sweet, and to the point. You don’t need a million accounts. If it hasn’t been, it’s never too late.
Two Types of Accounts
There are two major types of accounts:
- Balance sheet accounts that tell what you own and owe. These are determined by your checking accounts, inventory, and credit cards.
- Income statement accounts that tell you about current period operating results. These, in turn, have two major categories, income and expenses. For companies with inventory, expenses are further broken out into cost of goods sold and other expenses.
Three Purposes
A chart of accounts should meet three needs:
- Make it really fast for you to do your taxes
- Give you all sorts of “Aha’s”
- Allow you to spend far more time on revenue analysis than expense analysis because that’s where success lies for small businesses
Taxes
Your accounts should be the same as (or be able to be grouped into) the lines on your tax return. You can find a copy of the tax form you fill out. For example, a sole proprietor will use a Schedule C of the 1040, and a corporation will complete an 1120.
There are a few special needs, such as meals and entertainment which are only partially deductible, that you need to pay special attention to. We can help you with that.
Aha
As small business owners, we work with a gut feel, but when you see what you’ve made or spent in black and white, it takes on a whole new level of meaning. Your income statement and other reports should do that for you. If they don’t you may not have your accounts set up right.
Revenue
Think about how you want to see your revenue:
- By product line
- By major supplier
- By category of solution to the customer
- By customer type
- By service type
- By location (you can also use Class for this)
- By job
- By distribution method
We can help you brainstorm based on your industry and type of business.
Actionable Intelligence
If you’ve been putting all your revenue into one revenue account, it will be exciting the first time you see your new Profit and Loss statement.
If you’ve been breaking out your revenue but it hasn’t led to any actionable change in your business, then there may be a better way to break it out.
If you’re happy with the way your revenue is broken out, then think about how you can take it to the next level.
Once you see your new chart of accounts, you will likely have even more questions. The chart of accounts can be an evolving entity, designed to serve your business needs.
