The INCOME STATEMENT for BEGINNERS - YouTube

hey there I'm James you're watching Accounting Stuff

and in this mini-series i'll show you how to make financial statements with an example

financial statements are accounting reports that summarize a business's activities

over a period of time there are three main ones that you should know about

they're called the income statement the balance sheet and the cash flow statement

in this video i'll show you how to make  an income statement

we'll cover the other two next on this channel so if you'd like to watch those then consider subscribing

the income statement is a financial report that summarizes a businesses  revenues and expenses over a period of time

it works like this if you take a business's revenue and subtract its expenses

then you're left with a profit or a loss that's why it's sometimes called the profit and loss statement  

or the P&L but we'll call this one the basic income statement

it's nice and simple but it doesn't give us much information we need to expand it out to see the full detailed income statement

at the top we have operating revenue which is the income earned from doing business

and then we take away any direct operating costs these are the cost of sales and that leaves us with

a gross profit or a loss beneath that we subtract any indirect operating costs

or overheads to reach an operating profit or loss and finally we take away the indirect non-operating costs

things like interest expenses and tax which brings us down to the bottom line

the business's net profit or loss

if you'd like to learn more about these terms then  you can check out my other income statement video  

and i also summarize it all on my income statement  cheat sheet

and I'll leave links to both of those down in the description

how do you make a basic income statement

the first thing you'll need is a trial balance a trial balance is an accounting report showing the closing balances

in all general ledger accounts at a point in time here's one for a dating app called Tumble

it's an adjusted trial balance which means that all of Tumble's  adjusting entries have already been posted  

and it was run on December 31st which happens  to be the end of Tumble's financial year

this trial balance holds a complete list of  Tumble's accounts and closing balances

debit balances go in the left column and  credit balances go in the right column

but how does this help us make an income statement  well we can start by drawing a line

because accounts in a trial balance are usually arranged in order above this line we have Tumble's assets  

liabilities and equity these are all balance sheet accounts which we can ignore

we're interested in this stuff below the line Tumble's revenue and expenses which are their income statement accounts

the basic income statement is Tumble's revenue minus its expenses in this case they earned 60 million dollars in revenue

and incurred 50,350,000 dollars in expenses

that leaves them with 9,650,000 dollars in profit baby

but how do we make the detailed income statement

the method is pretty much the same if we go back to Tumble's adjusted trial balance

then all we need to do is categorize their expenses like we did before

cost of sales is a direct operating cost general, administrative, selling, marketing, depreciation and amortization

are all indirect operating costs and finally interest and tax expenses are indirect non-operating costs

but please please be careful with depreciation and amortization if the long-term assets that they relate to

aren't used in operations then these would also be indirect non-operating costs

in this video I'm assuming that they are used in operations right that's the hard bit out the way

all we need to do now is lift these numbers out of the adjusted trial balance

and put them in the corresponding sections of the income statement

that leaves us with a revenue of 60 million dollars just like before

less 17.5 million dollars in cost of sales which is a direct operating cost

which gives us a gross profit of 42.5 million dollars then we deduct indirect operating costs

to reach an operating profit of 10,450,000 dollars and below that we subtract the indirect non-operating costs

interest and tax which leaves Tumble with a net profit of

nine million six hundred and fifty thousand dollars on the bottom line

shout out to all of my channel members for  your support

in the next videos I'll show you how to make a balance sheet and a cash flow statement

in the same way I'll see you then