Sign Michigan Banking Profit And Loss Statement Myself

Sign profit and loss statement

in this video you'll learn what's an income statement is I'll show you what it looks like and how you can use it to measure a business's financial performance hey there welcome back to accounting stuff I'm James and in today's video we're going to cover the income statement also known as the profit and loss statement or the P&L for short this is one of the three major financial statements in accounting along with a balance sheet and the cash flow statement collectively these reports give us an impression of the business's financial health so it's important that we understand how they work I've already made videos covering the balance sheet and the cash flow statement which you can find linked up here and down below in the description but up until now I haven't posted a video yet on the income statement and I've received a lot of requests from you guys to cover this topic so thanks for all these particularly from one subscriber so Nili if you're watching this video goes out to you good luck in your exam hope you crush it an income statement is the summary of a business's revenues and expenses over a period of time in his basic form an income statement looks like this it's a summary of a business's revenues and expenses over a period of time when we take our total revenue and subtract our expenses from it then we work out our profit or our loss we make a profit when our revenues exceed our expenses and on the flip side we make a loss when our expenses are more than the income we've earned this is why the income statement is also known as the profit and loss statement or the P&L for short it lays out a roadmap for how we ended up here at the bottom line our profit or loss the income statement always covers a period of time which could be anything that we wanted to be but typically we run it for a month a quarter or a full year here's a hopeful analogy that I read in this book the accounting game which I recommend reading if you're new to accounting you can find my review of it up here back to it if a balance sheet shows us a snapshot about business's assets liabilities and equity at a single point in time then you can think of it as a photograph or a still frame taken from a video whereas the income statement covers a period of time it's like watching a clip of that video it has a beginning and it has an end and if we look at it carefully and analyze it then it can tell us a story but more on that later let's take a closer look at our income statement revenues less expenses make us a profit or a loss the problem with this layout is that it doesn't give us much detail it would be much better if you made things a little more descriptive for instance revenue there are many different types of revenue if we were running a business that sells physical products then we might want to call this product sales instead or if we provide services we can call this our services rendered this extra detail hopes the readers of the income statement better understand what they're looking at clarity is that a movie game here the same goes for expenses businesses typically incur many different types of expense but broadly speaking these can be broken down into two categories or direct costs of doing business and are indirect costs of running the business or direct costs of doing business are the costs which we can directly trace through to the products we've sold or the services that we've provided for a business that provides services we might call this our cost of services and if we sell physical goods then we can call this our cost of sales or our cost of goods sold direct costs like these are variable costs which increase in direct proportion to the sales that we've made if you were running a retail or a wholesale business then these would include things like the original purchase price of the product that you're reselling or if you've run a manufacturing business then this would include the cost of your raw materials or the direct labor cost that went into producing your product as we make more sales we incur more of these direct costs cost of goods sold can be a bit of a tricky concept to understand at first it ties in very closely with inventory in the balance sheet if you'd like to see me make a video explaining how all of that works then let me know down below in the comments and if you haven't already remember to hit that subscribe button so you don't miss out on all of the other accounting tutorials that we have coming out very soon back to the income statement when we take our revenue and deduct our direct costs of doing business we get to our gross profit if you're new to accounting then you'll soon discover that we have many different types of profit our gross profit is a really useful tool that allows us to measure the efficiency of our production and sales process I'll show you how that works in a minute but first let's jump back to indirect costs these are the costs of running a business which can't directly be traced back to the production of goods or the provision of services we sometimes call these overheads overheads can include fixed costs like rent employee salaries insurance costs admin expenses legal costs accounting costs marketing costs depreciation and amortization for there's a lot of them fixed costs like these tend to remain the same they bear no correlation at all to the sells that your business has made however not all overheads are fixed variable overheads can loosely correlate with a business's sales although they can't be directly traced back to the production of goods or the provision of services these include things like advertising costs which can indirectly drive sales and sales commissions utility costs could also be considered a variable overhead in a manufacturing business because these can increase as we've ramped up production when we deduct our indirect costs of doing business from our gross profit we come to our operating profit operating profit measures the net income that we've generated from operations this is the residual amount that's left over after deducting all of our direct and indirect costs of doing business so this is our basic income statement but how does it help us measure a business's financial health it does that by giving us a means to compare our financial performance against comparative accounting periods a comparative period is a different period of time it can be whatever we want it to be we can compare a current month income statement against last month's income statement or this year versus last year when we use comparative periods we can calculate the change or movement across each line item down the profit and loss statement and as accountants it's our job to support these movements with a narrative which explains all of the differences let's throw in some numbers into an imaginary company and I'll show you what I mean we'll compare the movements in our P&L year-on-year this is going to be for a medium-sized business so we can quote our numbers in thousands of dollars what have we got here our imaginary company has made sales of a hundred and ten thousand dollars which is up ten thousand dollars from what we made in the prior year our cost of goods sold have also increased by ten thousand dollars from $30,000 to $40,000 that's left us with a gross profit of seventy thousand dollars which has remained unchanged our overheads are fixed at forty five thousand which gives us an operating profit of twenty five thousand dollars in each period what can we learn from all of this well our sales have increased by ten thousand dollars but our gross profit has remained exactly the same how can that be a useful metric that we can use to analyze this is gross profit margin we can calculate our gross profit margin by taking our total product sales and deducting our costs of goods sold and then dividing the whole Lots by our product sales this measures how efficiently we've been producing and selling our imaginary product in this case our gross profit margin in the car here is around 64% which is actually down from last year's gross profit margin of 70% how is that possible well one of two things could be happening here our sales can be shrinking or our costs could be rising we could be selling more products but at a discount or the cost of our raw materials could be rising these are the questions that we need to be asking ourselves as accountants investors or small business owners we can compare metrics like the gross profit margin across comparative periods to help us identify what questions we should be asking and then that's when the work begins we need to find out the answers and use them to build a narrative that explains what's going on gross profit margin is just one of many business metrics that we can use to analyze the income statement if you'd like to see me make videos on the others let me know now this is still quite a basic income statement in reality there are other indirect costs of doing business which we might need to include as well things like interest expenses and tax these tend to slot in the lower operating profit because they aren't considered to fall within the normal cost of operations this is why operating profit is also known as EBIT or earnings before interest and tax when we deduct her interest in tax from our operating profit we calculate our net profit the bottom line because it's at the bottom of the profit and loss statement so you can see that there are many different types of profit and loss to consider in accounting we start off with our revenue and we deduct our direct costs of doing business to come to our gross profit of top-line profit below this we take out the indirect costs of running our business to find out operating profit our EBIT our earnings before interest and tax and when we remove interest and tax we calculate our net profit the bottom line together these different types of profit help us measure performance over a period of time the main goal of most businesses is to maximize their profits so it's important to be clear on what that means and to be aware of the differences between gross profit operating profit and net profit which can each tell us a different part of the story like I mentioned earlier the income statement is just one of the three main financial statements along with the balance sheet and the cash flow statement I've made videos covering both of these already which you can find here and here if you found this one useful give it a like or better yet share with a friend why not don't forget to subscribe for more accounting tutorials I'll see you around [Music]