If you are a small business owner and are actually reviewing your business financial reports from time to time, here are some tips to help see potential dangers on your Income Statement (Profit & Loss) report:
- Negative Account Balances
- Negative account balances on your Income Statement (Profit & Loss) means perhaps this particular account is not being utilized correctly. Perhaps drill down into the details history of this and find out exactly why your current balance here is showing negative.
- Accounts with similar names and purpose
- Example: Office Supplies vs. Office Expenses
- Try to understand the exact purposes of similar looking accounts and verify that there is indeed a good usage for all of these accounts.
- Accounts with very tiny balances
- If you are reviewing an Income Statement late in the year and one of your accounts only has a very tiny balance, then verify this information is really useful for you; if not, then consider deactivating this account for next year.
- Using Direct costs (Cost of Goods Sold or Cost of Services Performed) Accounts
- If you are hiring subcontractors to perform your main line of work or purchasing materials to build the items you are selling, then realize that these types of expenses are not overhead or for administrative purposes. You need to separate and categorize out these expenses as Direct Costs (Cost of Goods Sold or Cost of Services) and thus let your financial system calculate the gross profit BEFORE it calculates the overall net profit at the bottom of the report.
Note: AccuraBooks is a bookkeeping firm only, so please consult with your C.P.A. for verification and clarification about the contents of this article.