Financial Statements are basically Income, Cashflow and Balance sheets. For the purpose of this article and considering intended audiences, I am dividing it into two sections - Creation (for your own business)and Interpretation(for investments in listed companies)
What is an Income Statement?
It is also called Profit and Loss Statement. Take any period(quarter/half/yearly), record all the Revenues and Expenditures.
If Revenue - Expenditure = +ve (profit)
If Revenue - Expenditure = -ve (loss).It is as simple as that.
So income statements are for a particular period and their real purpose is to identify whether the business is in profit or loss.
There are general formats you can observe in Income statements in India(Check some on moneycontrol website). Businesses sell either Products(any trade, manufacturing, retail etc) or Services(IT, customer care, hotels, bank, hospitals, salons etc).
They sell either products or services and generate revenues.For the purpose of understanding,we will create a business which sells goods(say Yolo-650(medicine))for the calendar year 2021.
Take sales data first,
No.of quantities sold = 10000
Sale value per qty = Rs.20
Total sale value = 10000*20 = Rs.200000
Total Sale value = Total Revenue = Gross Revenue = Rs.200000
Assume out of 10000 quantities sold,100 were returned because of quality or various other reasons.This is called Sale returns.This happens mostly in Product based businesses.
Also 200 quantities were sold in bulk to a prime customer.Since he/she is a prime customer,we offered him some lunch in 5 start hotel worth Rs.500.This is called Allowances.
So sale returns = 100 * 20 = Rs.2000
Allowances = Rs.500
Total = Rs.2500
When we subtract this from total revenue, we get Net Sales = 200000 - 2500 = Rs.197500
Anything directly revolves around Sales will come under Revenue head in Income Statement
We can't sell if we don't purchase and purchase has cost attached to it.If you are manufacturer,you procure raw materials and if others in supply chain,you buy Yolo-650 from manufacturer.Basically we are talking about Inventory here.
If you start a new business, your Beginning Inventory = 0.
There will always be Purchases in the given period irrespective of starting or ongoing business.
There will be Freight or Parcel charge.
If you are from manufacturing, there will be Direct labour involved or else Direct labour = 0
Direct Labor = Labor cost involved in the conversion of raw materials to Yolo-650.
There will be Indirect expenses(say you hire a load man to shift stocks from godown)
There will be Closing Inventory at the end of given period.
Inventory available = Beginning Inventory + Purchases + Freight + Direct Labour + Indirect Expenses
Cost of Goods Sold = Inventory Available - Ending Inventory
When we subtract closing inventory from inventory available,we get sold inventory right?
Gross Profit or Loss = Net Sales - COGS
Note:Everything you enter should be in monetary values.
Stay tuned for the next part which will cover operating expenses and other incomes.