11 Apr BLUEPRINT TO YOUR PROFITS
Profits we all want them! We all love them! Heck that is what we all work for profits – positive profits! We did not become business owners to pay others to work for them or to go in debt – we became business owners to make money!
Did you know there are two different types of profits?
Did you know that depending on what decisions you have made regarding your accounting processes and procedures; that those decisions have a direct effect on if you have two different types of profits listed on your Income Statement or if you only have one?
So what are the two different types of profits that are available on your Income Statement? First there is the Net Profit which will show up no matter how you set up your accounting system. Net Profit is your income minus your expenses. Second is Gross Profit which will only show up if you are utilizing cost of goods sold within your chart of accounts. Gross Profit is your income minus cost of goods sold.
As discussed in our blog To Income Statement or Not you can receive either a simplified or detailed Income Statement if you decide to Departmentalize your Income Statement. This also pertains to how you have decided to set up your accounting processes and procedures, especially your chart of accounts.
Simplified Income Statement
If you have chosen Financial Accounting, Cash Basis, set up a limited Chart of Accounts and do not Departmentalize your Income Statement you will have the ability to see only your Net Profit on your Income Statement.
When printing off a financial accounting Income Statement you will receive how much money you have received in in income and how much you have spent on expenses. Depending on how many accounts you have in your chart of accounts that you are actively using this can be an extremely long report or it can be a very short report. Long or short it doesn’t matter it still is only telling you how much you made and how much you spent – resulting in your Net Profit.
Income – Expenses = Net Profit
Detailed Income Statement
If you have chosen Management Accounting, Accrual Basis, set up a detailed Chart of Accounts and Departmentalized your Income Statement you will have the ability to see both your Gross Profit and Net Profit on your Income Statement.
When printing off a management accounting Income Statement utilizing cost of goods accounts within the chart of accounts you will receive an in-depth Income Statement providing you with your Gross Profit and Net Profits.
Income – Cost of Goods Sold = Gross Profit
Gross Profit – Overhead Expenses = Net Profit
To take that one step further if you have set up departments within your accounting software program you can print off a departmentalized Income Statement; providing you with your Gross Profit and Net Profit for each department within your business.
Income – Cost of Goods Sold = (Departmentalized) Gross Profit
Gross Profit – Overhead Expenses = (Departmentalized) Net Profit
Now I would be remiss if I did not mention that both your Gross Profit and Net Profits can be negative amounts resulting in Gross Profit(Loss) or Net Profit(Loss) if your cost of goods sold or expenses were more than your income.
Every decision made throughout the accounting process as stated in our previous blogs has a direct effect on what information will be available to you. You make the decisions that are right for you and your business.
Applied Management Group is here to help you make those decisions. To design an accounting system that works for you providing you with the information you need to make informed management decisions to move your business forward. We take the use of spreadsheets and make those a thing of the past.