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.