Ask the Accountant…
Question: Recently, I had a question about what a balance sheet shows, so I thought I’d tackle income statements as well.
Answer: The income statement is also known as a profit and loss statement, or a P&L. It shows what you have earned and what you have spent to produce a profit (or a loss) over a period of time. It provides the answer to the question, “Are you making any money?”
The income statement begins with the income from operations, which is your revenue from the sale of items, and then reveals your cost of goods sold (COGS), which are the expenses directly related to that which was sold. In our industry, the most common COGS categories are the product costs and freight.
- Income – cost of goods sold = gross profit
- Gross profit divided by income = gross profit percentage
Gross profit percentage is a useful number to monitor. It shows the portion of sales you are paying to the supplier. In our industry, 40 percent is an industry benchmark, meaning 60 percent is being paid to the supplier. You can control this by how much you charge your customers for items sold or how much you pay your suppliers and shippers.
Operating expenses follow gross profit. These are your costs of doing business not directly related to your sales, such as telephone expenses, insurance, payroll and utilities. Once these are deducted (subtracted) from your gross profit, you have net income (or loss)—your bottom line.
- Income – cost of goods sold = gross profit
- Gross profit – operating expenses = net income
In managing your business, your P&L gives you the information to review and adjust your business operations. It allows you to calculate the impact of increasing sales, or reducing your cost of goods sold, or reducing your operating expenses to increase net income.
Please email your questions to Harriet at Ask The Accountant.
QuickBooks Premier and Enterprise can be modified to better serve ad specialty distributors. Harriet Gatter is a QuickBooks ProAdvisor, a former accounting professor and a former ad specialty distributor. She advises ad specialty distributors to use QuickBooks Premier and Enterprise, often in conjunction with other industry-specific software, to manage the complexities of the ad specialty business, with the results being time saved, errors eliminated and an overall accurate accounting of your business. Contact her at [email protected].
