An income statement otherwise known as a profit and loss statement is a summary of a company’s profit or loss during any one given period of time, such as a month, three months, or one year.
The income statement records all revenues for a business during this given period, as well as the operating expenses for the business. What are income statements used for? You use an income statement to track revenues and expenses so that you can determine the operating performance of your business over a period of time.
Small business owners use these statements to find out what areas of their business are over budget or under budget. Specific items that are causing unexpected expenditures can be pinpointed, such as phone, fax, mail, or supply expenses. Income statements can also track dramatic increases in product returns or cost of goods sold as a percentage of sales.
They also can be used to determine income tax liability. It is very important to format an income statement so that it is appropriate to the business being conducted. Income statements. along with balance sheets, are the most basic elements required by potential lenders, such as banks, investors, and vendors. They will use the financial reporting contained therein to determine credit limits.
Sales: The sales figure represents the amount of revenue generated by the business. The amount recorded here is the total sales, less any product returns or sales discounts.
Cost of goods sold: This number represents the costs directly associated with making or acquiring your products. Costs include materials purchased from outside suppliers used in the manufacture of your product, as well as any internal expenses directly expended in the manufacturing process.
Gross Profit: Gross profit is derived by subtracting the cost of goods sold from net sales. It does not include any operating expenses or income taxes.
Operating Expenses These are the daily expenses incurred in the operation of your school. In this sample, they are divided into two categories: marketing, and general and administrative expenses.
Salaries: These are the salaries plus bonuses and commissions paid to your staff. C
ollateral and promotions: Collateral fees are expenses incurred in the creation or purchase of printed sales materials used by your school in marketing and selling your product.
Advertising: These represent all costs involved in creating and placing print or multi-media advertising.
Other PR & Promotion costs: These include any other costs associated with promoting your school. They may include travel, client meals, professional conferences, equipment rental for presentations, copying, or miscellaneous printing costs.
Rent: These are the fees incurred to rent or lease space.
Utilities: These include costs for heating, air conditioning, electricity, phone equipment rental, and phone usage in connection with your business.
Depreciation: Depreciation is an annual expense that takes into account the loss in value of equipment used in your business. Examples of equipment that may be subject to depreciation includes copiers, computers, printers and fax machines.
Other overhead costs: Expense items that do not fall into other categories cannot be clearly associated with a particular product or function are considered to be other overhead costs. These types of expenses may include insurance, office supplies, or cleaning services.
Other expenses: This is a tabulation of all expenses incurred in running your business, exclusive of taxes or interest expense on interest income, if any. Net income before taxes: This number represents the amount of income earned by a business prior to paying income taxes. This figure is arrived at by subtracting total operating expenses from gross profit.
Taxes: This is the amount of income taxes you owe to the federal government and, if applicable, state and local government taxes.
Net Income This is the amount of money the business has earned after paying income taxes.
Balance Sheets
A balance sheet is a snapshot of a business’ financial condition at a specific moment in time. Usually at the close of an accounting period. A balance sheet compares assets, liabilities, and owners’ or stockholders’ equity.
Assets and liabilities are divided into short- and long-term obligations, including cash accounts such as checking, money market, or government securities.
At any given time, assets must equal liabilities plus owners’ equity. An asset is anything the business owns that has monetary value. Liabilities are the claims of creditors against the assets of the business.
What is a balance sheet used for? A balance sheet helps a small business owner quickly get a handle on the financial strength and capabilities of the business. Is the business in a position to expand? Can the business easily handle the normal financial ebbs and flows of revenues and expenses? Or should the business take immediate steps to bolster cash reserves? Balance sheets can identify and analyze trends, particularly in the area of receivables and payables. Is the receivables cycle lengthening? Can receivables be collected more aggressively? Is some debt uncollectable? Has the business been slowing down payables to forestall an inevitable cash shortage?
Balance sheets, along with income statements, are the most basic elements in providing financial reporting to potential lenders such as banks, investors, and vendors who are considering how much credit to grant the firm.
Assets: Assets are subdivided into current and long-term assets to reflect the ease of liquidating each asset. Cash, for obvious reasons, is considered the most liquid of all assets. Long-term assets, such as real estate or machinery, are less likely to sell overnight or have the capability of being quickly converted into a current asset such as cash.
Current assets: Current assets are any assets that can be easily converted into cash within one calendar year. Examples of current assets would be checking or money market accounts, accounts receivable, and notes receivable that are due within one year’s time. Cash: Money available immediately, such as in checking accounts, is the most liquid of all short-term assets.
Accounts Receivable: This is money owed to the business for purchases made by customers, suppliers, and other vendors. Notes receivables Notes receivables that are due within one year are current assets. Notes that cannot be collected on within one year should be considered long-term assets.
Fixed Assets: Fixed assets include land, buildings. machinery. and vehicles that are used in connection with the business. Land: Land is considered a fixed asset but, unlike other fixed assets, is not depreciated, because land is considered an asset that never wears out. Buildings are categorized as fixed assets and are depreciated over time.
Office Equipment: This includes office equipment such as copiers, fax machines. printers. and computers used in your business.
Machinery: This figure represents machines and equipment used in an industrial plant to produce its product. Examples of machinery might include lathes. conveyor belts, or a printing press.
Vehicles: This would include any vehicles used in your business. Total Fixed Assets: This is the total dollar value all fixed assets in your business, less any accumulated depreciation.
Total Assets is figure represents the total dollar value of both the short-term and long-term assets of your business.
Liabilities and Owners’ Equity This includes all debts and obligations owed by the business to outside creditors, vendors, or banks that are payable within one year, plus the owners’ equity. Often, this side of the balance sheet is simply referred to as “Liabilities.”
Accounts Payable: This is comprised of all short-term obligations owed by your business to creditors, suppliers, and other vendors. Accounts payable can include supplies and materials acquired on credit.
Notes Payable This represents money owed on a short-term collection cycle of one year or less. It may include bank notes, mortgage obligations, or vehicle payments.
Accrued Payroll and Withholding: This includes any earned wages or withholdings that are owed to or for employees but have not yet been paid.
Total Current Liabilities: This is the sum total of all current liabilities owed to creditors that must be paid within a one-year time frame.
Long-term Liabilities These are any debts or obligations owed by the business that are due more than one year out from the current date.
Mortgage Note Payable: This is the balance of a mortgage that extends out beyond the current year. For example. you may have paid off three years of a fifteen-year mortgage note. of which the remaining eleven years, not counting the current year, are considered long-term.
Owners’ equity Sometimes this is referred to as stockholders equity. Owners’ equity is made up of the initial investment in the business as well as any retained earnings that are reinvested in the business. Common stock: This is stock issued as part of the initial or later-stage investment in a business.
Retained earnings: These are earnings reinvested in the business after the deduction of any distributions to shareholders, such as dividend payments.
Total Liabilities and Owners’ Equity: This comprises all debts and monies that are owed to outside creditors, vendors, or banks and the remaining monies that are owed to shareholders, including retained earnings reinvested in the business.
Depreciation
The concept of depreciation is really pretty simple. For example, lets say you purchase a truck for your business. The truck loses value the moment you drive it out of the dealership. The truck is considered an operational asset in running your business. Each year that you own the truck it loses some value, until the truck finally stops running and has no value to the business. Measuring the loss in value of an asset is known as depreciation.
Depreciation is considered an expense and is listed in an income statement under expenses. In addition to vehicles that may be used in your business, you can depreciate office furniture, office equipment, any buildings you own and machinery you use to manufacture products.
Land is not considered an expense, nor can it be depreciated. Land does not wear out like vehicles or equipment. To find the annual depreciation cost for your assets, you need to know the initial cost of the assets. You also need to determine how many years you think the assets will retain some value for your business, In the case of the truck it may only have a useful life of ten years before it wears out and loses all value.
Straight-line Depreciation : Straight-line depreciation is considered to be the most common method of depreciating assets. To compute the amount of annual depreciation expense using the straight-line method requires two numbers: the initial cost of the asset and its estimated useful life. For example, you purchase a truck for $20,000 and expect it to have use in your business for ten years. Using the straight-line method for determining depreciation, you would divide the initial cost of the truck by its useful life.
Formula is initial cost divided by useful life = depreciation per year $20,000 divided by 10 years is $2,000 depreciation a year The $20,000 becomes a depreciation expense that is reported on your income statement under operation expenses at the end of each year. For tax purposes, some accountants prefer to use other methods of accelerating depreciation in order to record larger amounts of depreciation in the early years of the asset to reduce tax bills as soon as possible. You need, additionally, to check the regulations published by the federal Internal Revenue Service and various state revenue authorities for any specific rules regarding depreciation and methods of calculating depreciation for various types of assets.
Book value Depreciation is also reflected on your balance sheet as the difference between the “book” or “carrying” value and the initial price of an asset. You determine this by adding up the accumulated depreciation expense and subtracting it from the initial cost of the equipment. For example, you purchase a truck for $20,000 in 1992. It has an estimated useful life of ten years. The annual depreciation expense is $2,000. It is now December 31, 1994, and you want to show the book value on your balance sheet. Your entry on your balance sheet would have the following line items: Cost of truck acquired on January 1, 1992 = $20,000 Accumulated depreciation expense January 1, 1992 to December 31, 1994 = $2,000 a year for three years = $6,000 Book value = amount of truck cost not allocated to depreciation expense = $14,000 At the end of the tenth year, the book value of the truck will be zero because the truck will have no value
Amortization
In the course of doing business, you will likely acquire what are known as intangible assets. These assets can contribute to the revenue growth of your business and, as such, they can be expensed against these future revenues. An example of an intangible asset is when you buy a patent for an invention. Calculating amortization the formula for calculating the amortization on an intangible asset is similar to the one used for calculating straight-line depreciation. You divide the initial cost of the tangible asset by the estimated useful life of the intangible asset. For example, if it costs $10,000 to acquire a patent and it has an estimated useful life of ten years. the amortized amount per year equals $1 000. The amount of amortization accumulated since the asset was acquired appears on the balance sheet as a deduction under amortized asset.
