Today’s post is by our resident accounting guru, Andrea Whitney. For more of the Accounting 101 series, click here.
When you want to see how your company is doing for a period of time, you want to review the P/L, also known as the Profit and Loss Statement (or the Income Statement). This is going to give you a breakdown of your income and your expenses. And these are? And what do these do? And what does this have to do with the price of tea in China?
Gross Profit
First there is Revenue, also known as Income. Income is recognized whenever a business sells a product or performs a service.
Next are expenses. Expenses occur whenever you spend on an item, whether it’s a reduction of your cash, a reduction of an asset or the creation of a liability. In an Income Statement, expenses should be categorized for a company to understand their different levels of profit.
The first expense category is Cost of Goods Sold (COGS), which is composed of the costs related to sale of goods and/or services. These include all items in payroll that are the employer’s portions: FICA, Medicare, FUTA and SUTA taxes and Worker’s Comp. Cost of Goods Sold would also include discounts and bad debt from writing off clients’ invoices.
Once you have your Revenue and your COGS, you will know your company’s gross profit (subtract COGS from Revenue). Congratulations, you’ve completed the top half of the P/L statement!
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