One Blog Post at a Time
Understanding Gross Profit!
We accountants have all these terms: Gross Sales, Gross Profit, Net Income. What the heck? Why can’t we just keep it simple? You just want to know how much money you’re making, how much you have to invest in your business and how much you have to take home, right? Well let’s make it simple!
Gross Sales = How much money you are making.
Gross Profit = How much money you have to invest in your business.
Net Income = How much you have to take home. (We will get to this in the next blog)
Today we are going to talk about Gross Profit & Cost of Goods Sold.
So what’s the deal with GP & COGS and why should you care? Excellent question! There are two ways expenses are classified on a P&L, one as COGS and one as plain ol’ operating expenses.
As Thanksgiving quickly approaches, I’m already thinking about the menu, the guests & the decor. It’s a beautiful time of year. Nothing makes me happier than to have the people I love all together. All the food is placed on the island, the heart of the kitchen, and everyone digs in. In my family, it’s usually a free-for-all after grace. As a host, I make sure that the path of plenty makes sense. What’s does that mean? Well… I want the turkey to be before the stuffing and the mashed potatoes to be before the gravy. See where I’m going with this? I want flow...ease…delight!
The Profit & Loss statement reflects this need for flow. The P&L is the go-to for most business owners. Ultimately, it works everyday to show us exactly where our business is making money or losing it. In order for the statement to work correctly we have to place items appropriately.
Today we are talking about the first item of the proper flow:
Sales & Income
Still confused about the tofurkey? Let me explain...
Have you heard the old adage, "Make hay while the sun shines?" In simplest terms, the equity section of a balance sheet tells us exactly how much hay is in the barn.
This section of the balance sheet is usually the most confusing. Understanding it asks us to be a bit abstract.
Assets are straight forward. Liabilities are too. We know what we own, and we know what we owe.
Equity on the other hand is what our business is worth in accounting terms. (The equity section does not account for Goodwill that has been established.) To determine the true value of your business you would need to speak with a valuation expert.
In the simplest terms, equity accumulates the profit/loss throughout the life of the business, initial investments or injections and amounts withdrawn from the business. The exact way these are handled will depend on the type of entity.
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