Financial statements can be a daunting task for most folks. This overview will cover the three parts: income statement, balance sheet and cash flow statement as well as a couple of tips. Preferrably, use a spreadsheet program like Excel or Numbers for all of your work.
The Income Statement is a big list of all your income minus your expenses. Its a simple concept really, it gets complicated where you categorize items (and with the Tax Man).
Income = Money In (Sales/Revenues)
Your income can be categorized by product, service or just a lump sum. So if you were a restaurant it might look like:
Income
Food sales
Beverage sales
T-shirt, hat, apron sales
You could break it down further by breakfast, lunch, dinner. Don’t forget to subtotal your income.
Expenses = Money Out
Expenses start with Cost of Good Sold (COGS) meaning, any cost to produce the product you are selling should be attributed to COGS. Again, if you are a restaurant it will be ingredient costs, chef salary and your cost of those t-shirts.
Income - COGS = Gross Profit
The rest is overhead (and again taxes). Now, if you need to purchase major equipment like stove, oven, walk-in refrigerator, tables and chairs, hold these for later - these costs are assets expensed over time which we will deal with in the balance sheet section. We will come back to depreciation expense at that time.
Expenses
Automobile: fuel, service
Office supplies
Liability insurance
Marketing & Advertising
Phone, internet
Charitable contributions
Dues & Subscriptions
Depreciation
You get the idea...
Income - COGS - Expenses = Net Income (Profit, Revenue)
TIP:
Break out major expense areas. Have separate lists for marketing expenses and start up expenses or other expansive areas and link it back to your main list.
Next up: Balance Sheet
