Understanding Bookkeeping

COMPONENTS IN THE INCOME STATEMENT:

Net Revenue A

Cost of Goods B

Gross Margin C=A-B

NET REVENUE:

NET REVENUE are the list prices of the goods and/services less any discounts offered to the customer to induce purchase.

Don’t forget that these revenue is recognized in the period in which goods and services are sold, not necessarily the period in which cash is received which follow strictly to the matching and accrual accounting concept.

COST OF GOODS SOLD

COST OF GOODS comprise the TOTAL COST OF THE PRODUCT BEING SOLD.

Originally, when the manufacturer made the product, all the cost related to the product are added to the value of the inventory. When the product is sold, these costs of inventory are then expensed through the Income Statement as cost of goods sold.

GROSS PROFIT MARGIN

GROSS PROFIT MARGIN is simply Net Revenues less Cost of Goods Sold

The higher the gross margin, it means that there is a higher MARK-UP on the costs of Goods Sold .

Of course, a higher gross profit margin is favourable.

The higher the gross profit margin, it means that the company can absorb more overheads and can sustain longer when there is a period of recession where business dropped

AN INCOME STATEMENT:-

Reports ONLY the PROFITABILITY of a business

Unlike a Balance Sheet, which is a snapshot of a point of time, Income Statement reflects the profitability of a business FOR A SPECIFIC PERIOD OF TIME (monthly, quarterly or yearly).

In the Income Statement, MATCHING/ACCRUALS/REVENUE RECOGNITION concepts/principles will prevails:

Revenue is recognized in the period in which goods and services are sold, not necessarily the period in which cash is received.

Expense is recognized in the period in which goods and services are used, not necessarily the period in which cash is paid.

A few years ago, this Income Statement is called PROFIT & LOSS Statement.

Nowadays, it is called Income Statement or Earnings Statement

The basic equation for the Income Statement is:

Revenue less Costs & Expenses = Income

When Revenue is MORE than Costs & Expenses = Income/Profit/Earnings

( The term Income or Profit or Earnings has the same meaning)

When Revenue is LESS than Costs & Expenses = Loss

The Normal Format Of An Income Statement is as follows:

INCOME STATEMENT FOR THE PERIOD FROM 1/1/06 TO 31/12/06

Net Revenue                   A

Cost of Goods                  B

Gross Margin                   C=A-B

General & Administrative   D

Sales & Marketing            E

Research & Development  F

Operating Expenses         G= D+E+F

Income From Operations  H =C-G ( Gross margin less Operating Expenses)

Interest                          I

Income before taxes        J=H-I

Net Income after taxes     K