Fundamentals in Five Mins
Accounting Statements: Explained In 5 Mins
Did you know that over 30% of new businesses fail due to running out of cash?
Levelling up your accounting skills is one of the best ways founders and business owners can bring the odds back in their favour and the place to start is with the fundamental accounting statements.
That’s today’s topic, accounting statements. What they are, how they work, and what they are used for.
We’ve got lots to cover so let’s put 5 Mins on the Clock… And let's get into it!
First up is the income statement; also known as the profit and loss statement
The income statement articulates a company's profitability by accounting for all of the money coming in out of the business.
The basic income statement is constructed by summing up and ordering all our revenue and expenses so we can find the net difference between them.
Net Income = Revenue — Expenses
If we have more money coming in as revenue than going out as expenses, the income statement will show a profit. If we have less money coming in than going out, the income statement will show a loss. Simple, right?
There are some key points to understand about the income statement.
The first is that the income statement recognises the receipt of sale, not receipt of cash. This means a sale made in month one is recorded in month one’s income statement, even if the payment is to be made in month 2.
The second is that the income statement usually separates out the Cost of Goods Sold (COGS) separate line item under revenue, in order to assess our gross profit.
Gross profit = COGS — Revenue
Cost of Goods sold are the specific costs incurred by the company to generate revenue and our gross profit is a measure of how efficient the company is at producing the core things it sells. Both are important for founders to keep on top of.
The income statements main limitation is that it doesn’t account for the timing of cash in…