What Are Financial Statements?
A profit and loss statement gives the business owner knowledge of their profits and net income for each month. The statements provide a breakdown of income and expenses made during that month
For example, if someone owned a ranch housing horse their profit and loss would look like the example below. This sample statements gives you all the financial components needed to make a solid business decision. When using a software such as QuickBooks, it will give you options so that all your transaction can be categorized according to your expenses and deposit so you will know exactly what you spent your money on that particular month.
It is very important to categorize your transactions so that you will have an idea how much you spend on certain categories such office supplies, gas, food, entertainment, advertising, insurance, etc. These are just some of the basic categories every business normally has in operating a business.
I always encourage my clients to make the financial statement so they can understand and be knowledgeable of the terms they are using to categorize their transactions. This statement also allows you to have subcategories such as payroll which consist of wages, taxes, social security, and Medicare. You can have your parent category as payroll and then list the subcategory expenses. I have provided you with an example of a profit and loss statement below.
Definitions to Learn:
What is income? Income is money coming into the business as deposits in your account.
What is a markup? A markup is when you pay one price for a product, but you mark it up to make a profit from it.
What is a service? A service is something you provide to someone else for payment.
What is Unapplied cash payment income? Income that is not applied to a particular invoice or product on an account.
What is profit? Profit is income made from something you provided in your business to someone.
What are expenses? Expenses is money spent on supplies and things needed for your business.
What are bank charges? A bank charge is a fee paid to the bank for monthly services, overdraft fees, non-sufficient funds, etc.
What is operating income? Income that the business made after all expense has been paid.
Tax Preparation
The profit and loss statement can be provided at the end of the year for tax purposes. It is recommended to get a software to upload all your receipts just in case of an audit. You never know when that day will come but you want to be organized and ready to provide information for the auditor. It makes it easier for the CPA if your books are kept correctly during the year. Make sure you always include all liabilities and assets on your balance sheet.
As you can see the amounts are broken down into categories and at the end of the statement you get to see your actual profit or income to see what you actually made after all expense and your profit before expenses. This lets you know if you are spending too much money in certain areas of your business and then you will be able to determine why and cut back on those particular areas to make sure your company has growth instead of declining and it also lets you know where are financially so if the business needs anything you will be able to make a good decision on the purchase by knowing your financial status for the business.
How are losses shown on an income statement?
Losses are shown at the end of the bank statement representing a –(negative) number. It means you have no profit for that month after expenses. The business spent more money than it made. This happens when you are not taking control of your finances and paying attention to your financial statement to see if you have the money to make the purchase or not.
Personal vs business:
You should always keep personal transaction separated from your business. You never want to mix them because you always want to protect your personal assets. If someone sues the business, you do not want any personal transactions in there. They will only get what the business makes and not your personal assets. If you mix them then it is possible, they can go after both of them. It is your choice, but it is something I definitely would not recommend. The business transactions are transactions that you use only in the business to keep it in operation. The personal transactions are transactions you only use for personal use and through your personal bank account. Personal transactions are transactions that normally everyone in the household use that account. Those transactions cannot be use during tax time on your income tax. You can only claim the expenses for your business. If you want to contribute to the business, then it can be as an owner’s investment. I have seen situations where the busines was just starting and there was not enough money to conduct business within the business so the owner or owners will cover cost by depositing money in the business account. This what will be called an owner’s investment. It would be best if you have to make purchases for the business from your personal account to deposit in the business account first and then make the purchases instead of purchasing the goods straight from your personal account and then get reimbursed. You truly don’t want too many of those transactions of purchasing from your personal account because it can raise red flags. You should also provide a receipt for all purchases especially personal account purchases for business purchases. Business transaction show everything about the business such as the profits sales or services and expenses in categories such as office supplies, repair and maintenance, etc. on the profit and loss report. In business you also get to see the net income without personal transactions. If you want to track your personal transactions in a software found it your profits, expenses and net income you can do so in a separate account. When you obtain a limited liability company also known as LLC it protects you from your personal assets which is why you shouldn’t mix business with personal. Some types of business transactions:
Cash transactions
Non-cash transactions
Credit transactions
Debit Card transactions is the same as an immediate of cash
Some examples of financial transactions which can be business or personal:
sales, purchases, receipts,
Purchases
Receipts
payments.
My suggestion is to keep good practices with your books and don’t allow personal transactions into your business. Always make sure you separate items when you purchase at places like Walmart or Target because these are known places that people shop and don’t really feel like making multiple transactions. I would also suggest going to buy the things for the business maybe during the workday and pick another day to purchase personal items to help eliminate the transactions from being together.