Scribd
Upload
60 views

The Bottom Line

The document discusses the "bottom line" of an income statement in accounting. It refers to the bottom line as showing profits after subtracting all costs and expenses from sales. It provides examples of standard income statements and detailed profit and loss statements, showing how expenses are broken down into categories. The key point is that planning expenses accurately in the profit and loss statement, or "budgeting," is important for determining a company's profitability and future financial health.

Uploaded by

FunCity Nigeria
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
60 views

The Bottom Line

The document discusses the "bottom line" of an income statement in accounting. It refers to the bottom line as showing profits after subtracting all costs and expenses from sales. It provides examples of standard income statements and detailed profit and loss statements, showing how expenses are broken down into categories. The key point is that planning expenses accurately in the profit and loss statement, or "budgeting," is important for determining a company's profitability and future financial health.

Uploaded by

FunCity Nigeria
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
You are on page 1/ 2

The Bottom Line

by Tim Berry June 29, 2004 The familiar phrase, "the bottom line," used as synonymous with the conclusion or the underlying truth, is actually taken from the standard Income Statement in accounting, which subtracts costs and expenses from sales and shows profits as the bottom line of the statement. After you have pro ected sales and cost of sales, you need to think about comparing expenses to your sales. !xpenses start with personnel. Then you have rent, utilities, e"uipment, and probably some advertising, maybe commissions, public relations, and other expenses. #hat we$re leading to is profits. %rofits are what is left over after you subtract cost of goods &or sales', expenses, and taxes from sales. The Income Statement is the same as the %rofit and (oss statement. )ou$ll also find them called "pro forma," meaning pro ected, as in "pro forma income" or "pro forma profit and loss." The pro forma income is the same as a standard income statement except that the standard statement shows real results from the past, while a pro forma statement is pro ecting into the future. The first illustration below shows a standard income statement* the format and math starts with sales at the top. &This example doesn$t divide operating expenses into categories.' Illustration 1: Standard Profit and Loss Statement

+irst, subtract cost of goods &or sales' from sales. This gives you gross margin, an important ratio for comparisons and analysis. Acceptable gross margin levels depend on the industry. According to the recent +inancial Statement Studies of ,isk -anagement Association &,-A', an average shoe store has a gross margin of ./

percent. A hat manufacturer has a gross margin of 01 percent, and a grocery store about /1 percent. A more detailed %rofit and (oss analysis, which divides operating expenses into categories, is shown in the next illustration2 Illustration 2: etailed Profit and Loss Statement

This table divides operating expenses into standard categories, including Sales and -arketing expenses and 3eneral and Administrative expenses. It provides a clearer picture of the business expenses and what they stand for, though for some cases the extra detail may not be relevant. ,egardless of which statement style you choose, you make very important choices as you plan your profit and loss* this is where you plan your expenses. )ou are estimating expenditures across the business, from rent and overhead to marketing expenses such as advertising, sales commissions, and public relations. 4ecisions you make here are as important as the mathematics are simple. )our sum of expenses ultimately determines your company$s profitability. This is the business plan e"uivalent to budgeting, as you set your sights on the levels of expenditures you expect your company will need. As your business moves forward, save a copy of your plan in your computer. (ater, plug your actual numbers into the spreadsheets and compare them against your planned numbers. )ou can make decisive course corrections to your business based on this analysis.

You might also like