{"id":2336,"date":"2016-09-21T19:04:31","date_gmt":"2016-09-21T19:04:31","guid":{"rendered":"http:\/\/bbsaccountingservices.com\/?p=2336"},"modified":"2016-11-22T23:07:10","modified_gmt":"2016-11-22T23:07:10","slug":"understanding-your-profit-and-loss-statement-the-easy-way","status":"publish","type":"post","link":"https:\/\/bbsaccountingservices.com\/index.php\/2016\/09\/21\/understanding-your-profit-and-loss-statement-the-easy-way\/","title":{"rendered":"Understanding Your Profit And Loss Statement The Easy Way"},"content":{"rendered":"
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Business owners usually go into business for a myriad of reasons. These owners are usually proficient at their craft. A good plumber decides to open a plumbing business or a chef decides to start a niche restaurant. Accounting isn’t one of the skills that excite or are important to the owner. At least, not to start.<\/p>\n

After the business is off and running the owner begins to discover that accounting is a process. This process requires time to manage. But owners\u00a0haven’t been trained\u00a0on how to interpret\u00a0data on financial statements.<\/p>\n

So here is a quick overview on how to read the profit and loss statement<\/strong> for your business. Often the profit and loss has other names. These are income statement or even P&L\"pexels-photo-1\" for short. We prefer income statement, because it tells you how much money has come in, gone out, and how much remains.\u00a0\u00a0\u00a0All financial reports are telling a story.<\/em><\/strong><\/span>
\nProfit and loss statements tell\u00a0you a story. One\u00a0based on a simple formula — sales minus costs equals profit. The entire statement breaks down this formula. How much money did you receive during a given period?\u00a0Minus the costs associated with running your business and what remains is profit.<\/p>\n

On a P&L, costs display\u00a0below sales and profit is at the bottom. You may see many\u00a0subtotals as you look down the column, but it is still sales minus costs equal profit. Always keep this formula in mind.<\/p>\n

There are some nuances to the income statement. Even in this article, there exists a vernacular that can cause some points of confusion.\u00a0Unfortunately, we sometimes use different words for sales, costs and profits. Just like we use different words for profit and loss statements. This can at times make accounting seem difficult.\u00a0For example, sales can also be revenue or income. Costs may be called\u00a0expenses and profits may be\u00a0net income. Don’t let them distract you from the story the statement is telling you. Keep with it and you will understand.<\/p>\n

Moreover, your company\u2019s sales may be broken into several different sources. For example, the sales of a restaurant may come from customers who dine in or take out or from catering. Such a business may choose to break sales into those three pieces. These three components would be added together in a line called total sales.<\/p>\n

Costs are usually broken into various components. For example, you may see material costs, labor costs and overhead broken out separately. There are an infinite number of ways to break out costs.\u00a0\u00a0Once you get below the total sales line everything you see is a cost, broken out in one way or another.<\/p>\n

One of the most useful ways to subdivide costs is into those direct costs.\u00a0These\u00a0are directly associated with delivering your product or service\u00a0and those that are not. Consider a company that makes and sells different types of widgets. It will have the cost of the components used to make the widgets. It will also have\u00a0the cost of the workers who assemble the widgets\u00a0and the costs of the production facility. These costs,\u00a0referred to as cost of goods sold (COGS), can be directly\u00a0tied to the production of widgets.<\/p>\n

In a service business, this is called the cost of service (COS). For example, a lawn maintenance service would include the cost of the employees who do the work, fuel costs, and the cost of other supplies (such as fertilizer and grass seed).<\/p>\n

Sales minus COGS is known as gross profit (or gross margin). This is the money the business earns after it subtracts the cost of delivering its product and\/or services. It is also the money needed to cover the other costs associated with running the business and still generate a profit.<\/p>\n

Other costs of the business are not associated with the production of widgets. Such costs might be the cost of the people who sell the widgets, the cost of the accountants who produce the P&Ls\u00a0and even the president\u2019s compensation. These costs are most often referred to as selling, general and administrative costs (SG&A). With this addition, the P&L is now broken down into two parts:<\/p>\n

    \n
  1. Sales minus COGS equals gross profit<\/li>\n
  2. Gross profit minus SG&A equals profit<\/li>\n<\/ol>\n

    If you file\u00a0your P&Ls away without reading them, you are not alone. At the end of the day your P&L is an essential tool you need to run your business.\u00a0\u00a0Don’t miss out on what they have to offer you.<\/p>\n

    If you have questions about your P&L’s ask us a question<\/a>. We love helping and deciphering the story your P&L is telling.\u00a0\u00a0What is your story? Until next time, be good.<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

    Business owners usually go into business for a myriad of reasons. These owners are usually proficient at their craft. A good plumber decides to open a plumbing business or a chef decides to start a niche restaurant. Accounting isn’t one of the skills that excite or are important to the owner. At least, not to […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[88,1],"tags":[77,76],"class_list":["post-2336","post","type-post","status-publish","format-standard","hentry","category-accounting","category-uncategorized","tag-financial-reports","tag-profit-and-loss-statement"],"_links":{"self":[{"href":"https:\/\/bbsaccountingservices.com\/index.php\/wp-json\/wp\/v2\/posts\/2336","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bbsaccountingservices.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bbsaccountingservices.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bbsaccountingservices.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/bbsaccountingservices.com\/index.php\/wp-json\/wp\/v2\/comments?post=2336"}],"version-history":[{"count":1,"href":"https:\/\/bbsaccountingservices.com\/index.php\/wp-json\/wp\/v2\/posts\/2336\/revisions"}],"predecessor-version":[{"id":2338,"href":"https:\/\/bbsaccountingservices.com\/index.php\/wp-json\/wp\/v2\/posts\/2336\/revisions\/2338"}],"wp:attachment":[{"href":"https:\/\/bbsaccountingservices.com\/index.php\/wp-json\/wp\/v2\/media?parent=2336"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bbsaccountingservices.com\/index.php\/wp-json\/wp\/v2\/categories?post=2336"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bbsaccountingservices.com\/index.php\/wp-json\/wp\/v2\/tags?post=2336"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}