Tag: bookkeeping

Revenue: The Starting Point

The income statement starts with revenue, also known as sales or income. This represents the money your business earns before any expenses are subtracted. For most businesses, revenue can be broken down into different categories, depending on the nature of the business.

Common sources of revenue include:

• Sales (products or services)
• Fees and commissions
• Rental income and interest income
• For nonprofits, revenue also includes donations

You might also break down your revenue into specific categories to gain deeper insights into how your business is performing in different areas. Here are a few examples of how businesses typically organize revenue:

• In-store vs. online sales
• Food vs. beverage sales (for restaurants)
• Restaurant sales vs. catering sales
• Sales by department (women’s, men’s, and children’s clothing)
• Sales by location (if you have multiple stores)

Cost of Goods Sold (COGS): Direct Costs Tied to Sales

Next, we have the Cost of Goods Sold (COGS), which represents the direct costs associated with producing or acquiring the goods you sell. COGS is often separated from operating expenses because it directly impacts your revenue.

The formula for COGS is:

COGS = Beginning Inventory + Purchases – Ending Inventory

For manufacturers, this cost also includes direct labor (the wages paid to employees who produce the product) and the raw materials used to create the product.

Keep in mind, determining your COGS accurately requires precise inventory management. Regular inventory counts—whether manual or tracked through software—are essential. Also, fluctuations in purchase prices can affect your COGS, especially if inventory items were bought at different prices.

Operating Expenses: The Cost of Running Your Business

Now, let’s talk about operating expenses—the costs involved in running your business day-to-day. These expenses can be fixed or variable:

• Fixed expenses stay the same every month, such as rent, salaries, insurance, and depreciation.
• Variable expenses change from month to month, such as wages (if you’re paying hourly employees), utilities, credit card fees, and supplies.

Some expenses can fall into both categories. Take advertising for example: while contracted services like digital ads might be a fixed cost, other components—like ad spend or promotional events—could fluctuate based on your business decisions.

Other Expenses: Beyond Operations

In addition to operating expenses, businesses also incur other expenses that are not tied directly to day-to-day operations. These are typically separated on the income statement.

Here are a few examples of “other” expenses:

• Loan payments: The principal portion of a loan repayment isn’t deductible, but the interest portion is. Only the interest is accounted for here.
• Capital expenditures (CapEx): While expenses related to property and equipment are legitimate business costs, they aren’t shown directly on the income statement. Instead, these are capitalized on the balance sheet and then depreciated over time.
• Taxes: These include property taxes, sales taxes, and income taxes, and are generally listed separately from operating expenses.

The Bottom Line: Profit

After all expenses have been deducted, what’s left is your net profit (or loss). This is the amount that ultimately accrues to the owner(s)—and what determines if your business is financially healthy.

Final Thoughts

The income statement isn’t just a tool for accountants; it’s an essential document for any business owner. Understanding each section allows you to make smarter decisions about pricing, expenses, and growth. By regularly reviewing your income statement, you’ll have a clear picture of where your business stands and what adjustments might be necessary to hit your goals.

Here’s a template to show you what an income statement looks like:

Company Name
	2025
Revenue
Less:  Cost of Goods Sold
Gross Profit	$             –
Expenses:
Administrative Expenses
Advertising and marketing
Credit card fees
Depreciation
Insurance
Interest expense
Licensing and registration
Professional Services
Professional Memberships
Office Expense
Owner’s Draw
Rent
Supplies
Telephone & Utilities
Travel Expenses
Wages
Total Expenses	$             –
Net Profit (Loss)	$             –

If you’d like a changeable balance sheet template, feel free to email me at susan.ball5@aol.com, and I’ll send it your way!