Income statement & Balance Sheet

First, you need to determine your SALES REVENUE - the income your business gets from either selling your product or service. Estimate how much sales revenue you make for 12 months as a first year business.

Next, determine your COST OF GOODS SOLD (COGS) or COST OF SERVICES PROVIDED. These are the variable costs to your firm which increase as your sales revenue increases.

If you subtract these COSTS from your SALES, you get your GROSS PROFIT

From your GROSS PROFIT, you can subtract each of your fixed expenses or USAIIRDO except for INTEREST (& DEPRECIATION depending on the type of business) & this gives your OPERATIONAL PROFIT. This is sometimes known as EBIT (EARNINGS BEFORE INTEREST & TAXES) or if also before DEPRECIATION & AMORTIZATION (don't worry about this for now), EBITDA.

For an Excel Spreadsheet helping you to determine your INCOME STATEMENT, DEPRECIATION, BALANCE SHEET & INTEREST expense click HERE.

From your OPERATIONAL PROFIT, subtract INTEREST, TAXES, & DEPRECIATION if you haven't already done so to get your NET PROFIT or NET INCOME. This is also known as "THE BOTTOM LINE". Your SALES would be known as your "TOP LINE".

BALANCE SHEET

ASSETS = LIABILITIES + OWNER'S EQUITY

ASSETS are composed of CASH, ACCOUNTS RECEIVABLE (money owed to you for selling a product or service), INVENTORY (goods you have in your possession that needs to be sold) PROPERTY PLANT & EQUIPMENT that you own & do not rent.

LIABILITIES are monies that are owed to someone else: ACCOUNTS PAYABLE (money owed to suppliers), short term USAIIRDO monthly expenses (except for DEPRECIATION), & long term LOANS

OWNER'S EQUITY = ASSETS - LIABILITIES

OWNER'S EQUITY is the residual value of the company after all liabilities are paid.

RETAINED EARNINGS are the portion of the net income that is reinvested back into the company rather than paid out in dividends.

Mr. Filipinas
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