You already know what constitutes the income statement. You have your sales revenue, gross profit, operation expenses and what not. These result in the net profit you will squander in December.
It’s okay, we don’t judge. The most important thing is how you interpret the information and, as such, use the knowledge to make the correct decisions.
How an income statement looks like on excel
|[Your Business Name]|
|Income Statement for Period ended||(Date||Here)|
|cost of goods sold||subtract|
|selling expenses (e.g; advertising)||subtract|
|administrative expenses (e.g; rent)||subtract|
|other income (e.g; sale of fixed asset)||add|
|Profit Before Tax|
|Net Profit (or Loss)|
Unlike in the case of the cash flow statement, here we enter records on the basis of when they were earned or incurred. If you made a sale and are yet to receive payment (you probably supply the Government or a failing retail chain) you must still record the transaction as part of sales revenue. Those are the rules.
The income statement has one use
You use the income statement to make decisions to affect profitability. That’s it. When investors and creditors take a look at what you’ve prepared this year they’ll only care about gross profit and net profit. One way to enjoy good profits in Kenya is venture into businesses with high barrier of entry.
It will be up to you to analyze the other records affecting the two figures. For example, you may have to decide between increasing sales and reducing expenses to drive up profits. Of course, when business is bad you do the latter.
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