Understanding a Profit & Loss Statement will help you succeed in Business

Understanding a profit and loss statement will help you succeed in business. I know this sounds a bit far fetched, but it happens to be true. I have been bookkeeping for nearly 20 years and every time I have a client decide to look over the profit and loss statement with me and to ask questions and to understand it their business starts to turn around. They then realise how to make effective changes within their business and therefore their business starts to thrive even more than it was before.

Over the next two weeks we will be taking a look at what makes up a profit and loss and how to read it effectively so that you can understand it more effectively and start to turn your business around.

What is a profit and loss statement?

A profit and loss statement is also known as an income statement. It lists your sales and expenses and is recorded either on a monthly, quarterly or yearly basis. It reflects the past performance of the business and is a report most often used by small business owners to track how their business is performing.

This report measures the profit or loss that a business is making. It can help you develop sales targets and appropriate sales prices for goods/services using various tools to help.

What is in a Profit and Loss?

Another name for a Profit and Loss Statement is an Income Statement, Revenue Statement, Statement of Financial Performance, Earnings Statement, Operating Statement or Statement of Operations.

The Profit & Loss Statement has 2 different sections that represent the accounting equation: Income – Expenses = Profit (or loss)

Incomeall of your income from your primary business activities are included here – Sales of Products or Services. Also any income from your secondary activities – Bank Interest – and any other financial gains.

Expensesall of your business expenses from your primary activities – materials and labour costs. Also any expenses from secondary expenditure – bank fees – and any other losses during the period.

Revenue (Income)

Revenue (Income) is the amount of money that the company actually earns during a specific period. This includes discounts and deductions for returned merchandise. You can have Operating Revenue (income) and Non-Operating Revenue (Income).

Operating Revenue is typically earnings before interest and taxes. It is earned from the sale of goods and services specifically related to the business.

Your Chart of Accounts can look like pretty much whatever you want it to, the more detailed it is the better reports you get from your accounting program. Following is an example of what it could look like.

Operating Income

41000  Sales/Services

42000  Miscellaneous Income

Non-Operating Revenue is gains from sources not related to the typical activities of the company. It can include gains from investments, sales of property or assets.

Your Non-Operating Income in your Chart of Accounts will look something like this:

Non-Operating Income

81000  Other Income

81100  Interest Income

81200  Trade in on Motor Vehicle

81300  Rent Received from Investment Property

Expenses

Expenses are the amounts paid or incurred for the purpose of earning revenue, such as paying wages or repairs to a vehicle, which may be used in the business.

Expenses can be broken down into Cost of Goods Sold, Operating Expenses and Non Operating Expenses.

Cost of Goods Sold are the direct costs incurred in the production of the Goods Sold by the business. This includes the cost of the materials used in creating goods along with the direct labour costs used to produce the goods.

As with the income, the more detailed your Cost of Goods Sold is the better reports you will get. Your Chart of Accounts could look like this:

Cost of Goods Sold

51000  Purchases for Resale

52000  Freight

Operating Expenses are expenses incurred in the carrying out of the businesses day-to-day activities; they are not directly associated with the production of goods or services.

Once again, the more detailed your expenses are in your Chart of Accounts the better reports you will get. Your Chart of Accounts can look like this:

Operating Expenses

61000  General and Administrative

61110  Accounting Fees

61120  Advertising

61130  Bank Charges

61140  Bookkeeping Fees

61145  Client Gifts

61150  Computer Repairs/Supplies

61155  Couriers

61160  Depreciation Expenses

61165  Donations

61170  Expensed Equipment

61180  Insurance

61190  Legal Fees

61200  Meeting Expenses

61210  Office Supplies

61220  Postage

61230  Printing

61240  Subscriptions/Registrations

61250  Taxis/Travel

62000  Communication Expense

62110  Fax

62120  Internet

62130  Mobile telephone

62140  Telephone

63000  Motor Vehicle Expenses

63100  MV – Expense – Vehicle 1 (AAA-111)

63110  MV 1 (AAA-111) – Depreciation

63120  MV 1 (AAA-111) – Fuel

63130  MV 1 (AAA-111) – Parking & Tolls

63140  MV 1 (AAA-111) – Registration & Insurance

63150  MV 1 (AAA-111) – Service & Repairs

63200  MV – Expense – Vehicle 2 (ZZZ-222)

63210  MV 2 (ZZZ-222) – Depreciation

63220  MV 2 (ZZZ-222) – Fuel

63230  MV 2 (ZZZ-222) – Parking & Tolls

63240  MV 2 (ZZZ-222) – Registration & Insurance

63240  MV 2 (ZZZ-222) – Service & Repairs

64000  Occupancy Expenses

64110  Electricity

64120  Gas

64130  Property Insurance

64140  Property Taxes

64150  Rates

64160  Rent

64170  Water Rates

66000  Payroll Expenses

66110  Fringe Benefits Tax

66120  Staff Amenities

66130  Staff Recruitment

66140  Staff Training

66150  Superannuation Expense

66160  Wages & Salaries

66170  Workers’ Compensation

66180  Other Employer Expenses

Non Operating Expenses are expenses incurred by activities not relating to the core operations of the business. They can include interest charges or borrowing costs.

Your Chart of Accounts may look like the following:

Other Expenses

91000  Interest Expense

92000  Loss on Sale of Motor Vehicle

93000  Investment Property Expenses

99999  Client to Advise

We use Client to Advise for items we are unsure of. We then take the list to the owner of the business and ask them where to allocate these expenses.

Over the next week, have a look closely are where you are allocating your income and expenses in your accounting program. Are they going to the right place? Make sure that when you get to do a Profit and Loss Statement it is able to tell you the correct ‘story’.   Next week we will look at how to calculate Profit (Loss) and why we need to.



Please note: I reserve the right to delete comments that are offensive or off-topic.

Leave a Reply

Your email address will not be published. Required fields are marked *