Monday, November 11, 2013

How much do you know about accounting? Part II

Last week we talked about increasing your knowledge of accounting and focused on the Balance Sheet. This week we will focus on the Profit & Loss Statement (P&L) also known as the Income Statement.

The P&L provides all the information about what you earned (sales or revenue) and what you expended for whatever period of time you are interested in.  Our QuickBooks program can show us a P&L for a day, a week, a month, a quarter, a year or even longer.  You can also get this same information with the same time period from the previous year along side it for comparison.

A typical P&L starts out with the Sales or Revenue.  The amount of detail provided depends on how you have set up your books.  When we are setting up accounting programs for clients, one of the first things we ask is "What kind of information are you looking for from your books?  How much detail do you want/need?".  Some people want different categories for their sales and others are content with one number.  We track revenue by the different types of services we provide so we can see what is generating the largest amount of money for us.

If you are a manufacturer or a business with inventory, the next section of the P&L will deal with Cost of Goods Sold (COGS).  COGS is exactly what it sounds like: the cost of making or buying the goods you then sell.  The amount of detail here will also depend on what type of business you have (do you have labor as well as materials needed to produce the goods) and how your books are set up.  It is nice to see percentages along side the dollars at this point of the P&L.  Dollars alone won't give you the whole picture as your COGS may have increased in dollars, but only because you have made more because you are selling more.  The percentages would show you that the COGS increased in dollars, but remained the same % which would mean that you did make more because your sales are increasing.

The next sections of the P&L deals with all the other expenses which occur when you run a business.  The detail here is also dependent on the set up of the books.  Do you want  to know how much you spent on credit card processing fees and bank service charges or are you comfortable lumping them together?  Do you want to see what you spent on repairs for equipment vs. repairs to your facilities or is one number for repairs and maintenance enough detail for you?

The end of the P&L is what most people are interested in: is there a net profit or loss?  If your expenses are larger than your revenue, there will be a loss.  Sometimes you will have a loss for a specific period of time (typical for seasonal businesses) which isn't alarming as long as the business generates a profit for the whole year.  A company can survive a loss, the economic downturn of a few years ago proved that.  Having sufficient cash flow makes that much easier which we will address next week.

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