What is the Profit and Loss and how does it work?- Part 2 – Expenses
In businesses that sell stock you will find a line directly below income called Cost of Goods. Reports in most small business accounting software will display this as COGS
This line represents the actual costs (COGS) associated with the Products you sold in the period you report from your small business accounting software. The purpose of this line is to help folks who sell products calculate the gross margin or gross profit, in other words the amount of profit made after taking into account the costs directly associated with acquiring and selling the goods.
Gross profit or gross margin is the sum of subtracting COGS from Income. Gross Margin is often expressed as a percentage and to calculate the gross margin and express it as a percentage just divide the Gross Margin by the value of sales you made in that period. Now if you’re a Services Business life is a little more complex if you want to determine the Gross Margin you make on Services (and you should). The reports in some small business accounting software systems will help you determine this.
Visit the Small Business Heroes channel on Youtube for videos explaining the Profit and Loss and other accounting elements. It is standard practise to the Operating Expenses (business running costs) directly below the COGS line. The business running costs are known as the Operating Expenses and they tell us what was spent where and when.
For clarity expenses are grouped together in sections that detail the sales & marketing, general and R&D. As you can see these sections represent major functions or centres of activity in a business. These rows reveal the detail about what was spent where in the timeline.
The balances in these sections are derived from Expense Accounts and it’s really important that you know and understand that there are two major types of Expense in any business. These are Fixed and Variable expenses.
