Part V: The Income Statement

In previous additions we talked about how to figure out what kind of small business you should operate and figuring out some of your start up cost. Now we are going to start getting into the financial statements you need to make.

The first one we will go over is the Income Statement with is also refereed to as the P&L with stands for profit and loss.

The first part of the income statement is estimated sales. You need to make realistic estimates of how much you are going to make. I would recommend doing estimated P&L statements for the first five years. It will usually take about three years before you start making a profit.

The Cost of Good Sold applies to retail businesses. Here is how you calculate your cost of goods Sold:

Beginning Inventory            100

Purchases                              100

         -Returns                         50

Frieght                                   50

Ending Inventory                   100

Cost of Goods Sold                100

Now the returns in the Cost of Goods Sold are returns to your vendors, not customer returns.

After you subtract your cost of goods sold you come up with your gross profit. After that you take out all those lovely expenses such as rent, power, insurance, phone, internet, and any other payments you may have then you end up with your net profit or (loss).

Sales                                  100

Cost of Goods Sold             50

Gross Profit                         50


Rent                                     25

Electricity                              5

Insurance                               5

Phone                                     5

Total Net Expenses              40

Net Profit                             10

Now of course yours will be a little more complicated but you get the general idea.

If you are a retail business I also suggest you subtract 10% off your sales to account for customer returns and put that in the balance sheet which I will talk about later.

Keep your income statements simple when you’re getting started. As you become more familiar with them you can get more creative with them.

Another source for more information is Accountingcoach

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