Income Statement: Sales, Profit, Loss
If you want to understand your company’s profitability, then you need the income statement.
The income statement shows your profitability for a period of time. It could be a day, a week, a month, the entire quarter or a year. For most small businesses, you’re going to be looking at your income statement over the period of a month and then you’ll be sitting down with your accountant at the end of a year to look at the entire year.
The income statement calculates profitability by adding up all of your sales in the period and then subtracting all of your expenses in the period. Sales minus expenses is equal to net income. If net income is positive, you’re profitable. If net income is negative, then you’ve suffered a loss and you’re not profitable.
Let me show you a quick example. Let’s say that in January, we had a total sales of $10,000 and that all of our expenses added up to $8,500. If we subtract the $8,500 from $10,000, we’ll end up with a net income of $1,500. Because it’s a positive number, it means that we’ve been profitable.
Alright, so just before we go on to showing you what a loss might look like, here’s a couple of things to make this income statement look a little bit better. Anytime we have a mathematical function like adding some numbers or subtracting one number from another, we put a single line, which means, here, that the $8,500 gets subtracted from the $10,000 in order to equal $1,500. And then, at the bottom of any financial statement, the last number has two lines underneath it, a double-underline$1,500.
Now let’s see what happens when our expenses are greater than our sales. Sales of $10,000; let’s say expenses were $12,000. We’re going to do some mathematics here — $10,000 minus $12,000 is equal to minus $2,000 with a double-underline -$2,000. That shows a loss. Sometimes losses aren’t shown with a minus sign in front of them; sometimes they’re shown with brackets ($2,000) and that means exactly the same thing.
Sales, expenses, net income — so far, so good? Alright, onto the next video.