For that reason, many accountants consider EBITDA the best measure of how a business is performing. You have considerably more control over your internal costs than your external-taxes, interest payments, and other expenses are partly determined by the work of financial professionals. Operating earnings is sometimes called EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). It’s a measure of how profitable your business is, without taking into account external costs, like interest payments, taxes, depreciation, and amortization. Once you take into account all internal costs, you get your operating earnings. In our example, though, they’re broken out into individual line items. Some profit and loss statements will bundle these and similar expenses together into one broad category: Selling, General & Administrative Expenses (SG&A). You can consider it a rough measure of how your business is performing.Īlso referred to as “operating expenses,” general expenses include rent, bank & ATM fees, equipment expenses, the cost of marketing & advertising, merchant fees, and any other expenses you incur in order to keep your business running. This number tells you how profitable your business is after taking into account direct costs, but before taking into account overhead costs. When you subtract COGS from your sales revenue, you get gross profit. Indirect expenses-for instance, utilities, bank fees, and rent-aren’t included in COGS. In the case of Terracotta Warriors, that might include planting pots (purchased wholesale), wages for employees, and the cost of shipping online orders. (In this case, it’s the year ending on December 31, 2021.) Cost of goods soldĪbbreviated as “ COGS,” this is the cost of producing the goods or services you sold to your customers during the reporting period.ĬOGS involves only direct expenses: Raw materials, labor, and shipping costs. The sales revenue line simply represents your total revenue for the time period you’re reporting. How you calculate your revenue depends on whether you do cash or accrual accounting and how your company recognizes revenue-particularly if you’re tracking income for a single month (rather than a year, as part of an annual report.) Profit and loss statements should be read top to bottom-so we’ll go through this one line by line, starting at the first.įurther reading: How to Read (and Understand) an Income Statement Sales revenueĮvery profit and loss statement starts off by showing your company’s revenues.
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