How to account for profits and loss

Almost every company uses a form of financial statements to help keep track of how their company is doing financially. It is in the financial statements of any company that you will discover the company's retained earnings. The most common place to find a company's profit or loss is in the Income statement. Every year dividends or a share of the profit are paid to the shareholders or owners of the company, this is usually a set amount of the net earnings, such as thirty percent or ten percent, which is then taken away from net earnings to give you the amount of retained earnings a company has.

Currently there are two kinds of income statements used by business, the single step income statement and the multiple step income statement. Which income statement your company decides to use depends on what kind of company you run and if your company is publicly traded or not. Let's take a look at the components of an income statement to see how you can account for profit and loss.

Difficulty rating: Easy to moderate

Step one:
Net sales: This can also be called revenue or sales. This section is the very first section of an income statement and covers all money made by the company in the course of their business through their customers. If a company has investments but they are not related to its customers (meaning it is not part of the services offered by the company) the income from those investments are not considered sales.

Step two:
Cost of sales: This is what it costs you to make or sell your product to your customers. If you produce cars it would be what the car costs you to make, but if you are doing retail it would be the cost of your inventory that you are using for resale.

Step three:
Gross profit: To obtain the gross profit you will need to subtract the amount of cost of sales from the company's net sales. This amount is what is used to cover all of the other expenses of the business that are can not be tied to producing or selling the products or services of the company.

Step four:
Selling, general, and administrative expenses: This covers all of the companies operating expenses. Some of these expenses can be payroll, advertising, utilities, and rent. They are usually fixed cost expenses for the company but they are still crucial to the running of the business.

Step five:
Operating income: By subtracting the selling, general, and administrative expenses from the gross profit you will come to the operating income. This income represents a company's earnings from its normal operations before other things like taxes and interest are taken out. This income is usually more reliable than net income to see if a company is financially sound.

Step six:
Other income and expenses: This is where a company would add in income from investments or other money the company has earned throughout the year. They would also subtract out any other expenses such as interest that they incurred on behalf of the company throughout the year.

Step seven:
Pretax income: This is what is left over after all of the income and expenses are figured for the company. This money is what the business must pay taxes on.

Step eight:
Income taxes: This is just an estimated amount of income taxes that the company will be paying for the year since the taxes have not yet been paid.

Step nine:
Net income: This is the bottom line of the company's profitability. After subtracting out income taxes from pre tax income you will be able to see how much your company made for the year. It is from this amount that any money paid to owners or shareholders is subtracted from and what is left over gets put back into the company as retained earnings or retained profit.

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