To calculate and keep track of earnings and profits, a small business can take a page out of the accounting practices of large corporations. An income statement calculates business profits for a specified period and will quickly show where your business generates earnings and what you can do to be more profitable.
Gross Profit Is the Fuel for Your Business
The basic form of the income statement calculates two levels of profits. The first two lines are the revenues or sales totals from business operations followed by the cost of goods sold. The difference is the company's gross profit. Cost of goods sold will be either the wholesale prices paid or manufacturing costs, including raw materials and manufacturing labor. Gross profits show the success of a company's sales operations.
Business Expenses Burn the Fuel
The gross profits are not the final earnings from the business. Out of the gross earnings the company must pay general and administrative expenses. These expenses include any costs paid to run the business, including wages, employee benefits, rents, utilities, insurance, taxes and supplies. Subtract the business expenses from the gross profits to calculate net earnings or profits. A C corporation must also subtract corporate income taxes to reach net income. Sole proprietors, partnerships, limited liability companies and S corporations pass earnings through to owners untaxed. The owners pay income taxes on their personal returns.
- Photo Credit g-stockstudio/iStock/Getty Images
What Is Retained Earnings on a Balance Sheet?
A company's balance sheet shows a snapshot of the company's finances at any given time: the assets, liabilities and owner's equity. The...
How to Calculate Accumulated Retained Earnings
A company's accumulated retained earnings are the cumulative residual profits or losses since the start of its business activities. If it is...
How to Calculate S Corp Retained Earnings
The two main components of S corporation equity are contributed capital and retained earnings. Contributed capital is comprised of current shareholder contributions,...
How to Calculate Net Earnings
Determining a business’s net income gives the business owner a true idea of how profitable the business is. When an employee receives...
How to Calculate Earnings Growth
Profits are the lifeblood of company operations. Without profits, companies have difficulty staying afloat and have to borrow or raise funds from...
How to Calculate Corporate Profits
Most companies are in business to do one thing: make a profit. Profits are calculated by subtracting total expenses from total sales...
Revenue Vs. Profit
Revenues and profits are both extremely important to the success of a firm. The terms are sometimes used interchangeably by people unfamiliar...
The Differences Between General Reserve & Retained Profit
For business and accounting purposes, companies may create certain reserve accounts out of retained profit. Both a reserve account and the account...