The QuickBooks 2012 Income Statement - dummies

The QuickBooks 2012 Income Statement

By Stephen L. Nelson

Perhaps the most important financial statement that an accounting system like QuickBooks 2012 produces is the income statement. The income statement is also known as a profit and loss statement. An income statement summarizes a firm’s revenues and expenses for a particular period of time.

Revenues represent amounts that a business earns by providing goods and services to its customers. Expenses represent amounts that a firm spends providing those goods and services. If a business can provide goods or services to customers for revenues that exceed its expenses, the firm earns a profit. If expenses exceed revenues, obviously, the firm suffers a loss.

To show you how this all works take a look at the following tables. The first table summarizes the sales that an imaginary business enjoys.

A Sales Journal
Joe $1,000
Bob 500
Frank 1,000
Abdul 2,000
Yoshio 2,750
Marie 2,250
Jeremy 1,000
Chang 2,500
Total sales $13,000

The following table summarizes the expenses that the same business incurs for the same period of time. These two tables provide all the information necessary to construct an income statement.

An Expenses Journal
Purchases of dogs and buns $3,000
Rent 1,000
Wages 4,000
Supplies 1,000
Total supplies $9,000

Using the information from the preceding two tables, you can construct the simple income statement shown in the following table. Understanding the details of an income statement is key to your understanding of how accounting works and what accounting tries to do.

Simple Income Statement
Sales revenue $13,000
Less: Cost of goods sold 3,000
Gross margin $10,000
Operating expenses
Rent $1,000
Wages 4,000
Supplies 1,000
Total operating expenses 6,000
Operating profit $4,000

The first thing to note about the income statement is the sales revenue figure of $13,000. This sales revenue figure shows the sales generated for a particular period of time. The $13,000 figure shown as sales revenue comes directly from the Sales Journal.

One important thing to recognize about accounting for sales revenue is that revenue gets counted when goods or services are provided and not when a customer pays for the goods or services. If you look at the list of sales shown, for example, Joe (the first customer listed) may have paid $1,000 in cash, but Bob, Frank, and Abdul (the second, third, and fourth customers) may have paid for their purchases with a credit card.

Yoshio, Marie, and Jeremy (the fifth, sixth, and seventh customers listed) may not have even paid for their purchases at the time the goods or services were provided. These customers may have simply promised to pay for the purchases at some later date. However, this timing of the payment for goods or services doesn’t matter.

Accountants have figured out that you count revenue when goods or services are provided. Information about when customers pay for those goods or services, if you want that information, can come from lists of customer payments.

Cost of goods sold and gross margins are two other values that you commonly see on income statements. Suppose, for example, that the financial information shows the financial results from your business: the hot dog stand that you operate for one day at the major sporting event in the city where you live.

In this case, the actual items that you sell — hot dogs and buns — are shown separately on the income statement as cost of goods sold. By separately showing the cost of the goods sold, the income statement can show what is called a gross margin.

The gross margin is the amount of revenue left over after paying for the cost of goods. The cost of goods sold equals $3,000 for purchases of dogs and buns. The difference between the $13,000 of sales revenue and the $3,000 of cost of goods sold equals $10,000, which is the gross margin.

The operating expenses portion of the simple income statement repeats the other information listed in the Expenses Journal. The $1,000 of rent, the $4,000 of wages, and the $1,000 of supplies get totaled. These operating expenses are then subtracted from the gross.

Do you see, then, what an income statement does? An income statement reports on the revenues that a firm has generated. It shows the cost of goods sold and calculates the gross margin. It identifies and shows operating expenses, and finally, shows the profits of the business.

One other important point: Income statements summarize revenues, expenses, and profits for a particular period of time. Some managers and entrepreneurs, for example, may want to prepare income statements on a daily basis. Public companies are required to prepare income statements on a quarterly and annual basis. And taxing authorities, such as the Internal Revenue Service, require tax return preparation both quarterly and annually.