Financial Statements 101 (Part One)

Financial Statements 101

As a business owner there are two important financial statements that should be reviewed on a regular basis. They are the Balance Sheet and Profit and Loss Statement (also known as an Income Statement). This blog will cover the basic components of this statement.

The Profit and Loss Statement records the income you receive from sales as well as the expenses you incur in performing your business. If sales are greater then expenses your company generates a profit. If expenses exceed sales, then your firm is losing money.

Here are the components of a Profit and Loss Statement:

Sales

This represents the dollars you receive from selling your products or service.

Sales Returns and Allowances

This represents items and refunds returned and due to customers.

Cost of Goods Sold

This represents costs associated with producing products sold by a company. They include both material and labor costs.

General and Administrative Costs

These are the nonproduction costs associated with running your business. These include items such as rent, office payroll, utilities, office supplies, telephone, insurance, etc.

Depreciation

This represents a non-cash charge the IRS allows a business to write down the value of a company’s assets over the life of the asset. This is usually determined by a company’s accountant and owner.

Amortization

Amortization works like depreciation except it used to write down intangible assets such as patents and good will.

Profit Before Taxes

This represents sales less cost of goods sold, general and administrative expenses, depreciation and amortization.

Net Profit

This is profit before taxes less taxes due by a company.

These are the basic components of the Profit and Loss statement. Your company’s Profit and Loss Statement will be influenced by discussions between you and your accountant.