Name: The INCOME STATEMENT Explained (aka. Profit and Loss / P&L)
Uploaded: 2020-01-12T19:11:20.000Z
Duration: 11 min 26 s
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In this video you'll learn what an income statement is.

I'll show you what it looks like and how you can use it to

measure a business's financial performance.

welcome back to Accounting Stuff I'm James and in today's video

we're going to cover the income statement

also known as the profit and loss statement or the P&L

for short. This is one of the three major

financial statements in accounting along with a balance sheet

and the cash flow statement. Collectively these reports

give us an impression of a business's financial health

so it's important that we understand how they work.

I've already made videos covering the balance sheet and the

cash flow statement which you can find linked up here and

down below in the description. But up until now I haven't posted

a video yet on the income statement and I've received a lot of requests

from you guys to cover this topic so thanks for all these

particularly from one subscriber so Niloy, if you're watching

this video goes out to you good luck in your exam

hope you crush it! An income statement is the

summary of a business's revenues and expenses over a period of time.

In its basic form an income statement looks like this.

It's a summary of a business's revenues and expenses

over a period of time. When we take our total revenue and

subtract our expenses from it then we work out our profit or our loss.

We make a profit when our revenues exceed our expenses

and on the flip side we make a loss when our expenses

are more than the income we've earned. This is why the income statement

is also known as the profit and loss statement or the P&L

for short. It lays out a roadmap for how we

always covers a period of time which could be anything that we

want it to be but typically we run it for a month

a quarter or a full year. Here's a helpful analogy

that I read in this book the accounting game

which I recommend reading if you're new to accounting

you can find my review of it up here. Anyway back to it.

If a balance sheet shows us a snapshot of a business's assets

liabilities and equity at a single point in time then you can

think of it as a photograph or a still frame taken from a video.

Whereas the income statement covers a period of time

it's like watching a clip of that video it has a beginning and it has an end

and if we look at it carefully and analyse it then it can tell us a story

but more on that later. Let's take a closer look at our

make us a profit or a loss. The problem with this layout

is that it doesn't give us much detail it would be much better

if we made things a little more descriptive for instance

of revenue. If we were running a business that sells

physical products then we might want to call this product sales instead

or if we provide services we can call this our services rendered.

This extra detail helps the readers of the income statement

better understand what they're looking at. Clarity is the aim of the game here.

The same goes for expenses businesses typically incur many

different types of expense but broadly speaking these can be

broken down into two categories our direct costs of doing business

and our indirect costs of running the business. Our direct costs of doing business

are the costs which we can directly trace through to the products

we've sold or the services that we've provided.

For a business that provides services we might call this our cost of services

and if we sell physical goods then we can call this our cost of sales

or our cost of goods sold. Direct costs like these are variable costs

which increase in direct proportion to the sales that we've made.

If you were running a retail or a wholesale business

then these would include things like the original purchase price

of the product that you're reselling or if you've run a manufacturing business

then this would include the cost of your raw materials

or the direct labor cost that went into producing your product.

As we make more sales we incur more of these direct costs.

Cost of goods sold can be a bit of a tricky concept to

understand at first. It ties in very closely with inventory

in the balance sheet. If you'd like to see me make a video

explaining how all of that works then let me know

down below in the comments and if you haven't already

remember to hit that subscribe button so you don't miss out on all of

the other accounting tutorials that we have coming out very soon.

Back to the income statement. When we take our revenue and

deduct our direct costs of doing business

we get to our gross profit. If you're new to accounting

then you'll soon discover that we have many different types of profit.

Our gross profit is a really useful tool that allows us to measure

the efficiency of our production and sales process.

but first let's jump back to indirect costs. These are the costs

of running a business which can't directly be traced back

to the production of goods or the provision of services.

We sometimes call these overheads. Overheads can include fixed costs

marketing costs depreciation and amortisation

there's a lot of them! Fixed costs like these

tend to remain the same they bear no correlation at all

to the sells that your business has made. However not all overheads are fixed.

Variable overheads can loosely correlate with a business's sales

although they can't be directly traced back to the production of goods

or the provision of services. These include things like