Accounting – an explanation of the profit and loss account
From the secular point of view, what is the income statement? We examine the various elements of the profit and loss account: revenue, costs of goods sold, expenses and net income. Revenue reporting is useful because it is the story of business activity in order to have the budget for future operations and the risk of future cash flows being assessed. The profit and loss account is also recognized as a profit and loss account.
Due to the nature of the profit and loss account, the operations reflect the "30 June 2006" or "the year ending 31 December 2006". This is different from the balance sheet reflecting a certain date. Revenue statements include so-called "temporary" accounts and the balance includes "permanent" accounts. Temporary reports, such as sales revenues and expenses, are "closed", the net income / loss is determined and this net amount is made in the equity of an owner. The accounts will end at the end of a period, be re-opened and reused for the next period.
Revenue Statement Revenue Reduced by Selling Goods, Less Expense, Is Equal to Net Income or Loss. Revenues are sales of merchandising products; what are you selling? Sell goods? Are you selling services? This sales price is the number of items sold. Sales generally appear as net sales, and sales-related adjustments include sales allowances, revenue and allowances.
If the business sells the goods, the next part of the profit and loss statement corresponds to the price of the goods sold. If the store sells the services, then this part will not be. Since this is a large part of the expenditure for the retail facility, while it is a cost, it will be separate from other spending. The business needs to know how much inventory started and how much inventory was at the end of the period. You must also know how much inventory you have purchased over the period. There are many ways of inventory valuation, such as Fifo (first, first out), Lifo (last, first out), average cost, specific identification, etc. With respect. Given the high level of look at income statement, it is important to note now that the subjectivity of inventory methods makes it more art than science. The start of the inventory and the goods purchased are the same as those available for sale; the goods intended for sale minus the finishing inventory of the goods sold.
Expenditures are cash outflows for business. Some expenditures can easily be identified such as rental or mortgage loans, utility services, office payments, stocks, etc. These are called selling and administrative costs. Selling costs include costs related to the sale of goods, such as salespersons, shipping, freight, advertising, etc. Research and development costs are also valid. If you own the building, the vehicle or the equipment you have an amortization charge. This only means that if you have a device that lasts for a few years, you can write some of the cost of that asset for years as depreciation. Similarly to inventory costs, there are many ways of subjective determination of depreciation, such as straight lines, accelerated depreciation methods, etc. Thus, not only one possible answer can be given to determine depreciation costs.
To determine net income or loss, revenue should be deducted from the cost of the goods sold, less the costs. If this number is positive then it is a net income. If this number is negative then it is a net loss. This amount is excluded for capital access, for example, to the capital account of an owner for the sole proprietor or shareholder's assets.
Expenditures and / or revenue outside of normal business activity should be included at a separate stage. For example, a shop is a shoe store and sells one of their buildings or part of a vacant item that creates a cash inflow. This is not what you expect from a shoe store. In order for the profit and loss account to be comparable annually, this special income should be shown in a separate chapter above the net income.
So we reviewed the income statement at a high level, determined revenue components, the cost of sales, expenses, and net income. We have mentioned areas such as inventory valuation and depreciation, where different methods can be used to determine the various financial amounts. Businesses need to carefully select their methods and stick to their consistency. It is not completely impossible to change these valuation methods, but special disclosure would be required. Once we understand the basics of the profit and loss account, this will help us understand income statements from different companies, regardless of their nature. business.
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