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Accounting: Basic Financial Concepts to Know

by admin on July 20, 2015 Comments Off

Entrepreneurs’ engagement in businesses arose from the passion they have for their craft. They find themselves being experts in carrying out their skills, but, when it comes to accounting for the revenues and expenses, they feel uncomfortable. Perhaps, these businessmen often don’t do the work themselves but instead looks for some external accounting services Singapore.

A lot of people look for accounting firms in Singapore to interpret their statements for them. What they don’t realize is that analyzing the profit or loss statement is an easy task. A business owner need not to be a Certified Public Accountant, he just have to know some basic concepts and terminologies. Owners will benefit a lot from knowing how to monitor their business’ performance, and so efforts to learn it is never a waste of time but rather an investment.

First, it is imperative to know that Profit and Loss statement is the same as Income Statement. They differ in name, but the layout is the same. Both have three main elements: income, expenses and the net income (or net loss if the expenses are greater than the income). We will discuss the profit and loss statement from top to bottom.

The topmost portion presents Sales (if your business is in merchandising/manufacturing) or Gross Revenue (if your business sells services). These accounts represents the total gross income of your business, meaning no expenses have been deducted yet.

Next to Sales is Cost of Goods Sold. This line item represents the direct cost of creating your product. In merchandising businesses, that’s the cost of purchasing the product; for manufacturing, it represents the cost of producing the product. For service companies, the account next to Gross Revenues are the Cost of Services, which includes cost of labour, cost of supplies and the likes. Sales less Cost of Goods Sold is Gross Margin.

Next to be discussed are the selling, general, and administrative costs. Selling costs are the direct costs of selling your products (e.g. salary of selling agents); general costs are cost that cannot be attributed to any particular business activity (e.g. janitor’s salary); and lastly, administrative costs are the costs of office professionals working to run the business (e.g. documents processor).

Some Income Statements show Net Income / Profit as the difference between Gross Margin and Selling, General and Administrative costs. But then, some bookkeeping services add Fixed Costs to the statement. So, to arrive to the final bottom line, these fixed costs should be deducted first.

Learning some accounting is a must if you want to be a successful entrepreneur. If you already know, at least to read the profit and loss statement, you will need less help from external accounting services in Singapore.

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