Hey there and welcome to chapter one in acounting 101. Today we are going to take a look at the basics of accounting.
Financial statements make a huge part of accounting and understanding them lays the foundation to advanced concepts tin accounting So What are the Types of Financial Statements?!
Allow me to elaborate the purpose of each one. The Income Statements show us the profit and loss for the year. Lets take a look at this example:
It may look complicated at first but once you understand it you will find it one of the easiest things in accounting. So lets break it into smaller pieces to understand it better.
This part is what is known as a Trading Account but why?! Well here we are dealing with sales revenue which is how the money you got from selling a product or a service However IT IS NOT PROFIT. lets take a look at this example, lets say you have a business you bought some goods for $70 that is your Cost of Sales. Then you sold the goods for $100 which is your Sales Revenue. So this means that you have made $30 in profit which is known as Gross Profit in Accounting. Now lets move on to the second part.
This part is what is known as a Profit & Loss Account why?! Well it is because we calculate the profit & loss for the business. As we said before the Gross Profit is the profit you made from selling your product here it is $30. Now we add other sources of income that the business might have like money that the business makes from leasing an office space. This is known as Other Revenue/Income we put "Add" before it to signal that it is added not subtracted from the gross profit. After that we subtract any expenses that the business might have like monthly rent or electrical cost. This is simply Other Expenses Again here we add "Less" before it to signal that it is subtracted from the total. In the end we get our Profit/Loss for the Year here as we can see it is $15.
That is it for today I don't want to stress you out much in the beginning. Next time we will discuss the statement of financial position. I hope you've learned something valuable today and until next time have a great day
