Hands down, the greatest skill an independent accountant can develop is translating accounting information to non-accountants. A small-business owner has the majority of their time in their craft. Accountants have spent years learning and understanding financial data, something that many business owners have not done, and frankly have no need to do. That is why they hire accountants. We are starting a Back-to-basics series on our blog to present important financial information for small-business owners. The first topic- Income Statements.
Income Statements, sometimes referred to as a Profit and Loss, show how much money the company is making. It is broken out into Revenue, the business' income stream, Cost of Goods Sold, these are expenses directly related to the revenue, and Overhead, these are other expenses to keep the business running. Example:
Peter is a carpenter, and builds custom wood furniture. He buys wood, stain, and paint in January for $1,000, and will sell his products to a customer who commissioned him for the work for $5,000. On his income statement, he would show $5,000 of revenue, and $1,000 of direct costs, giving him a gross margin of $4,000; however, we now need to incorporate costs to keep his craft alive including business insurance, cell phone payments, marketing expenses, and rent. That is his overhead, and lets say it costs him $2,000 in January to keep his business running. This gives us a $2,000 net profit.
Although simplified, this is the basic information an Income Statement shows. Here is a great article from Entrepreneur magazine discussing this topic: http://www.entrepreneur.com/article/244207