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