General
Entrepreneurs, owners or shareholders, have as one of their main objectives, that the investments made in their companies, generate profits, with the consequent growth of assets, allowing their growth and solidification in the market.
One does not have to be a graduate of Harvard to understand that the difference between the value of sales and the cost thereof, corresponds to "earnings" not "profits." Once a microentrepreneur told me very well, adding and subtracting I know how much I earn in the businesses I do. Certainly these operations are necessary, but here the important thing is to know, what is added and what is subtracted.
Some entrepreneurs insist on managing pocket accounting and the most modern ones, in their calendar accounting: notes here, little notes there, to finally "calculate" how much they earned in a certain business.
In the management and the day-to-day experience, you can acquire the skills you want, but the detail of the information will be necessary for making final decisions and above all to exercise the proper controls that will improve the final balance of the figure. which represents the profits.
Accounting is the language of business, says an immensely well-known and well-used phrase, but that does not fully convince some skeptics.
Every company, regardless of its size, seeks financial goals. Each entrepreneur can better fulfill his role and clearly and convincingly achieve those goals, applying accounting principles in his business, opening himself up to understanding the accounting language.
Accounting and financial statements
Accounting is a discipline with standardized norms, principles and procedures, subject to laws, that guides us on how to order, analyze and record the operations or transactions carried out by the company, facilitating us to prepare the Financial Statements (let's call them summaries), which we They will scientifically show how business is going, in addition to providing us with information to project ourselves into the future.
The duly registered accounting information will allow us to prepare different Financial Statements, with specific missions or objectives, which will be an important tool in the development of our administrative management. They are the reflection of the economic movement of a company at a certain moment.
The main financial statements and the contribution of information of each of them are detailed below:
- The Balance Sheet (BG), which reflects all the resources that the company owns or controls (Assets); the debts it maintains (Liabilities) and the owners' interest in it (Equity). The Income Statement (ER), which summarizes the operations of the company derived from its economic activities of buying, producing, transforming and selling or either provide services during a certain period. This statement includes all the income generated by the company and all the costs and expenses incurred in its operations, to finally show us the result: profit or loss. The Statement of Cash Flow (EFE), which shows the movement of cash and Its applications. The Statement of Changes in Retained Earnings (ECGR) shows changes that may occur due to net income, distribution of dividends and capital contributions.The Statement of Evolution of Equity (EEP), which reflects the changes that have occurred in the different patrimonial items of the company, during a determined period.
Developing them based on the available information can be easy or cumbersome, depending on the registration circumstances, but the important thing is that, once these are obtained, they can be "read" and, when subjected to analysis, know what they say.
Income statement or profit and loss:
This time we will dedicate ourselves to the study of this document, which will be the only one of the Financial Statements mentioned above, which will show us the economic situation of the company, with reference to profits or losses.
It is also known as Performance Status; Statement of Income and Expenses, or Statement of Results, Statement of Products and Income, or Statement of Profits.
In order to know first hand, how the business is going and what results have been obtained in the operations carried out, the Income Statement is prepared; dynamic report that shows the income, costs and expenses incurred during a period (month, quarter, semester or one year), to finally reflect the Profits or Losses of the year, in the period in question.
General concepts:
The Balance Sheet is considered an x-ray of the economic status of the company in the period covered, which compared to another, from a different period, will reflect the growth or decrease in the values that reflect each of its accounts and / or groups of accounts (Assets (Cash, Banks, Investments, Properties, etc.) Liabilities (Creditors, Financial Obligations, etc.) and the behavior of the Equity (Capital, Profits for the Year, etc.), and for the specific case of the Equity the growth The decrease will be reflected in the figures that the Statement of Income will give in detail.
In fact, the Income Statement is a summary of the changes in capital and equity during the period, that result from commercial activities, and that shows us first hand if profits or losses are being generated, a message that we will use to take the actions of reinforcement or corrective measures that correspond, will also serve as a tool to formulate the future economic and financial policy of the company.
It is a complementary document and annexed to the Balance Sheet, which describes the operational process during a certain period and which, as we noted previously, reports in detail and in order how the result it reflects was reached. (Profit or Loss).
In this document you can study the Sales (Income), Costs, Expenses and Profits or Losses of the company.
The preparation, presentation and details of this document differ, depending on the type of company in question: Commercial, Industrial or Services.
Trading companies
In a commercial company, the cost is the value of the purchases of merchandise that will be sold at any given time.
The Expenses will correspond to the necessary expenses for the normal operation of the business: leases, services, salaries, transportation, etc.
The Income Statement will show the income derived from the sales achieved by the company and the costs and expenses that were required to generate the income. The difference between these items (Sales revenue less costs and expenses) will determine the profit or loss for the year.
Now, depending on the type of inventory administration, the elaboration of the Income Statement will change a little.
The administration or management of inventories may be done under the scheme of Periodic Inventories or permanent Inventories.
Periodic inventories will always force us to count, relate stocks to finally value them and thus obtain the global value of the merchandise inventory.
On the other hand, permanent inventories and any of the different systems that are used, will force us to control physical stocks using individual kardex cards or through systematic bar code readings.
The use of inventory management systems requires changes in accounting management (use of accounts)
If the company manages periodic inventories, the scheme would be as follows:
| La Castellana Warehouse | |
| Statement of income | |
| December 31, 2011 | |
| Sales | 50,000,000 |
| Initial inventory | 12,000,000 |
| + Shopping | 60,000,000 |
| Merchandise available for sale | 72,000,000 |
| - Final inventory | 32,000,000 |
| Cost of merchandise sold | 40,000,000 |
| Gross profit | 10,000,000 |
| - Administration expenses | 2,000,000 |
| - Selling expenses | 1,000,000 |
| Operational utility | 7,000,000 |
| - Non-operating expenses | 500,000 |
| Net operating income | 6,500,000 |
Note that the cost of the merchandise sold is established after subtracting the ending inventory. (Count, classification and valuation of the merchandise in stock at the end of the period in question), value that we will deduct from net sales, to obtain the blush of Gross Profit.
The initial inventory could correspond to two specific registration situations:
- To purchase merchandise at the time of starting the business. (Provisioning); The transfer of the value of the ending Inventory from the previous period to a new period.
For example, if at December 31, 2011 the final inventory of merchandise in the Income Statement was $ 23,000,000, this Value will become the Initial Inventory in the Balance Sheet as of January 1, 2012.
There are those who say, in a mistaken way, that the periodic inventory is already history, since the prevailing inventory is known as the Permanent Inventory, a situation that is not true, given that there are many businesses that in addition to managing a fairly wide range of products, their sales are retail and of little value, which do not justify being permanently generating invoices, which makes it difficult to control them using card-controlled inventories or even barcode systems, which would also imply having readers of these codes and the existence of software that records and downloads the output of the products sold.
This last system is still far from the reach of many small businesses.
Let us now see how the situation with the Income Statement is presented when the Inventory is permanently managed.
| La Castellana Warehouse | |
| Statement of income | |
| December 31, 2011 | |
| Sales | 50,000,000 |
| Less: cost of sales | 40,000,000 |
| Gross profit | 10,000,000 |
| - Administration expenses | 2,000,000 |
| - Selling expenses | 1,000,000 |
| Operational utility | 7,000,000 |
| - Non-operating expenses | 500,000 |
| Net operating income | 6,500,000 |
We can see that what we know as a set of inventories (initial inventory + purchases = merchandise available for sale - final inventory), has disappeared from the scheme and we only see the concept of cost of sales, value that is the product of the balance that is accumulated in the accounting account with this name.
Industrial business
In an industrial company the cost is formed by the sum of the disbursements that have been necessary in the manufacture or transformation of new products (Materials or Raw Material, Labor, and Factory Load).
The accounting records are part of Cost Accounting or Industrial Accounting. In this system, the Purchases account is replaced by the Raw Materials account and strict control over the time used by the people involved in the production process begins, directly and indirectly, and on the other hand, the inputs secondary that are not part of the product in a significant way, but that affect the increase in cost in the production process.
The production process then forces to establish inventory control for the raw material in general.
As we go through the different stages of the production process, what we know as products in process are occurring, which correspond to products that are in development and not yet finished and that as they go through each stage, They are adding materials and labor, which gradually change their cost, until they become Finished Products, another inventory that must be implemented and controlled.
Let us now see how the Income Statement would be presented for an industrial company.
| Condorito Shirt Factory Limited | |
| Simplified Cost Statement | |
| December 31, 2011 | |
| Direct Material | 20,000,000 |
| + Direct Labor | 6,000,000 |
| Production cost | 30,000,000 |
| + Inventory of products in process | 19,000,000 |
| Cost of products in process | 49,000,000 |
| - Final inventory of products in process | 5,000,000 |
| Cost of finished products | 44,000,000 |
| + Initial inventory of finished products | 12,000,000 |
| Cost of products available for sale | 56,000,000 |
| - Final inventory of finished products | 16,000,000 |
| Cost of manufactured and sold products | 40,000,000 |
To highlight in the previous scheme, the appearance of a new concept to refer to cost: Cost of Products manufactured and sold, which shows us the value of the products sold.
Let's find out how we establish it.
In order to establish it, we must prepare a previous scheme called the Cost Statement, which we will see in a simplified form, as follows:
| Condorito Shirt Factory Ltda. | |
| Statement of income | |
| December 31, 2011 | |
| Sales | 110,000,000 |
| - Cost of products manufactured and sold | 40,000,000 |
| Gross profit | 70,000,000 |
| Administration expenses | 15,000,000 |
| Selling expenses | 10,000,000 |
| 25,000,000 | |
| Net profit | 45,000,000 |
Service companies
In a service company, which, as we know, does not deliver any material or tangible goods, it will receive money for the activity carried out (consulting, education, etc.). The cost will be represented by the expenditures that were necessary for the provision of the service.
| SERVICIOS ADMINISTRATIVOS LTDA. | |
| Statement of income | |
| December 31, 2011 | |
| Service revenues | 35,000,000 |
| - Related operating expenses | 15,000,000 |
| Operational utility | 20,000,000 |
| - Administrative expenses | 8,000,000 |
| Operational utility | 12,000,000 |
Accounting accounts involved in the process:
The accounts used to prepare the Statement of Economic Performance are the so-called Income Accounts or temporary accounts, which have the particularity of being born with the period studied and dying with it.
The foregoing means that the Income, costs and expenses generated in a given period, determining in the establishment or preparation of the Income Statement, will only be related to it and do not have or will have any direct relationship or incidence with subsequent periods.
The performance statement demonstrates how revenue has been earned and how a company's expenses have been incurred during a given period.
Accounting rules and concepts to take into account:
Income: Income represents inflows of resources, in the form of increases in assets or decreases in liabilities or a combination of both, that generate increases in equity, accrued from the sale of goods, the provision of services or the execution from other activities, carried out over a period, that does not come from capital contributions.
Expenses. Expenses represent outflows of resources, in the form of decreases in assets or increases in liabilities or a combination of both that generate decreases in equity, incurred in the administration, marketing, research and financing activities carried out during a period, which are not it comes from capital withdrawals or surplus profits.
Operational Administration Expenses: All expenses incurred by the company to develop its activity and that are not related to a specific activity (sale, production, etc.), but that provide a general contest to the business. In this section, the salaries of office staff, couriers, mail service, telephones, leases, depreciation of furniture and equipment of these units, etc. will be recorded.
Operational Sales Expenses: Will be all the expenditures that have been necessary to carry out the sales work. These include the payment of salaries and commissions to sellers, expenses of goods delivery vehicles, advertising, packaging or packaging expenses, warehouse service, depreciation of the furniture and equipment of this agency, etc., in short, all expenses related to this activity.
Operating gross and the value of operating expenses.
Non-operating income: Corresponds to income received occasionally, for concepts other than the main purpose of the business, such as profit from the sale of fixed assets and other extraordinary income.
Non-operating income is added to the net operating profit, obtaining the Net Profits or Losses before Taxes, as the case may be.
The provision for taxes is subtracted from the net profit before tax, obtaining the Liquid Profit.
Non-operating expenses: Includes occasional expenses that do not correspond to the main purpose of the business, such as loss on the sale of fixed assets and other extraordinary expenses.
Income before taxes: Other income is added to operating income and other expenses are decreased to obtain net income before taxes.
Income taxes: It is calculated on the net profit before taxes, applying the percentage established by legislation according to the type of company.
Net profit: Net income before taxes, taxes are deducted to obtain net profit.
Appropriations: The final part of the profit and loss statement is known as the appropriations section, because it indicates what is done with the net profit obtained. A provision must be made for the taxes that the company owes for the profits obtained.
Reserves: The legal reserve is 10% of the net profit. Other voluntary reserves are calculated according to the percentages established in the company's statutes.
Profits for the year: This net value corresponds to the owners of the company and it is established in a final way, which for educational purposes would be as follows.
| SERVICIOS ADMINISTRATIVOS LTDA. | |
| Statement of income | |
| December 31, 2011 | |
| Net income before taxes | 3,152,270 |
| - Tax 30% (limited company) | 945,681 |
| Liquid profit | 2,206,589 |
| - Bookings | |
| Mandatory (legal) reservation | 220,659 |
| Bookings | 441,318 |
| 661,977 | |
| Profit for the year | 1,544,612 |
This article corresponds to chapter 8 of the book Financial Foundations for Microentrepreneurs, under review.
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As a complement we suggest the following video-course (4 videos, 31 minutes), from Educatina, through which you can expand and deepen your learning about the income statement, its items and records.
