Significance of the Income Statement

Quick reference

• 00:04 The significance of the income statements, or
• 00:07 said differently, why are they important?
• 00:11 When people ask me why should they look at their income statement,
• 00:15 I try to give them valid answers but also some fun answers.
• 00:19 Fun answers are, if you look at your income statement on a monthly basis,
• 00:23 you'll know the best time to go on vacation.
• 00:27 It's really when the business is slow.
• 00:29 The real answers include anticipating when to hire more help or
• 00:33 when to cut back on staff.
• 00:36 Businesses that operate seasonally need to know when does the season start and end?
• 00:41 Spotting changes in earning and spending is important.
• 00:44 Ideally, earnings go up and
• 00:46 spending goes maybe up at the same rate, maybe not quite as fast.
• 00:51 But the reverse is also true.
• 00:53 If there is a decrease in earnings, there should be a related decrease in spending.
• 00:58 Otherwise, there might be some financial issues.
• 01:02 Another reason is to compare the budget with actual spending.
• 01:06 In this case, budget isn't a restriction, budget is just projections.
• 01:11 At the beginning of the year, at the beginning of the quarter,
• 01:15 a business might sit down and say, okay, here's what we're hoping to earn.
• 01:19 Based on our projections, this is what we're going to have for revenue.
• 01:23 And based on our planning, this is how we're going to spend the money.
• 01:27 Comparing the plan against the actual helps the business
• 01:30 determine if they're on track or if they need to make changes.
• 01:34 Last but certainly not least,
• 01:36 looking at the income statement will help spot errors.
• 01:40 Let's explore income.
• 01:41 Examples of income include bookkeeping services, coffee sales.
• 01:46 I am a huge fan of my neighborhood coffee shops.
• 01:49 Photography packages and speakers at an event.
• 01:53 Let's look at some sample files for some more examples.
• 01:57 Let's look at QuickBooks Online sample file to review the income accounts
• 02:01 they've set up.
• 02:03 There's Design Income, there's Landscaping Services, which has a sub-account
• 02:08 of Job Materials, that has sub-accounts for Fountains and for Plants.
• 02:13 There's the account Labor, which is a sub-account of Landscaping Services.
• 02:19 You get the idea.
• 02:20 There's lots of different ways to arrange the income.
• 02:23 In software such as QuickBooks Online, you can have accounts with sub-accounts, and
• 02:28 then sub-accounts can have sub-accounts.
• 02:31 You can collapse them so you just have one summary account, or
• 02:34 you can expand them so you have detail.
• 02:38 Your income accounts should be broad categories.
• 02:41 In this example of Fountains and Garden Lighting, that's the broad category.
• 02:46 A more specific category that would not show up on the profit and loss but
• 02:51 rather would feed into the profit and loss would be the different types of fountains,
• 02:56 maybe the small, medium, and large.
• 02:59 An example I can give you is a convenience store.
• 03:02 When you go into the convenience store,
• 03:04 there are all kinds of delicious things for sale.
• 03:07 The convenience store is not going to have an income account for
• 03:10 every single line item.
• 03:12 They're likely to group them up.
• 03:14 Perhaps they group them as cold beverages, hot beverages,
• 03:18 hot case, chip sales, cookie sales, whatever the case may be.
• 03:24 Let's look at Zero.
• 03:25 In Zero sample file, they have one income account called Sales.
• 03:30 I wanted to show this because I wanted to explain that it's not necessary to
• 03:35 have a lot of detail.
• 03:36 Every business is going to decide what information do they want on the profit and
• 03:42 loss, which is a summary report.
• 03:45 For this demo company, they didn't need a lot of detail.
• 03:49 They said the word Sales is sufficient.
• 03:51 If they need more detail, they can find that in their records elsewhere.
• 03:55 When teaching people about income,
• 03:58 I spend a few minutes explaining the things that are not income.
• 04:02 And I do this because there are common mistakes that I encounter.
• 04:06 There is a misconception that if money gets deposited into a bank account,
• 04:10 that it must be income, and that's not really true.
• 04:15 If a business gets a bank loan, that's not income.
• 04:19 The bank loan is a loan, and the loan is a liability account.
• 04:23 The second example I have is when a product is returned to the store.
• 04:27 I have more than once gone to the store to buy printer ink, and however I buy the ink
• 04:32 for the printer I used to have and forgot that I no longer have.
• 04:36 When I return it to the store, the store returns the money to the business,
• 04:41 that money is deposited back in the bank account if they use the debit card or
• 04:45 it's applied as a credit to the credit card.
• 04:48 A common mistake that I see is that a business owner or
• 04:51 bookkeeper will look at that and say, that's income, and it's really not.
• 04:57 The third situation I want to discuss with you is when the owner has to put money
• 05:01 into the business.
• 05:03 If the owner needs to make a deposit into the company checking account,
• 05:07 that's not income.
• 05:09 That's an owner investment and will be applied to an equity account.
• 05:13 There are two other types of income mistakes that I want to review.
• 05:17 These are just kind of odds and ends that happen.
• 05:21 The first example is duplicated income.
• 05:23 A way that this will typically show up is that a business owner
• 05:26 will create an invoice for their customer.
• 05:29 The customer will pay the invoice.
• 05:32 The business owner will mark the invoice as paid in the accounting software.
• 05:36 And then the business owner will accidentally mark the deposit as a brand
• 05:40 new sale.
• 05:42 The second one is expenses that are misclassified.
• 05:46 I think my best example of this is going to be shipping.
• 05:49 If a business pays for shipping to get the goods into their warehouse,
• 05:53 when they sell those goods, they charge the customer for shipping.
• 05:57 They're going to have shipping income as well as shipping expense.
• 06:01 Every so often I see a situation where an expense, such as shipping,
• 06:06 is misclassified as an income such as shipping income.
• 06:10 It's not as common as the other mistakes, but it's common enough to bring it up.

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