Tutorial
Income Statements
One of your tasks in the accounting department is to create income statements to be included in the business plan. An income statement is a financial report that shows the owners, managers and others how much profit a company makes. There are two kinds of accounts in our chart of accounts that go on the income statement: Revenue and Expenses. The revenue portion is composed of sales of our product or service. The expense portion of the income statement contains amounts of money that we need to spend in order to create our sales. If you remember from our first chapter on Starting the Accounting System, there are many kinds of expenses. They vary from one business to another, but there are a large number of them that are common to all companies: Rent, Salaries, Advertising, Utilities, Depreciation, Repairs, etc.
Load in the template for the type of business that you have.
See links for blank income statements in the projects box above. Click on the appropriate link for your type of company to download the template. These are Microsoft Word documents that you will fill in with your company information. You should fill out the income statement with the amounts that you calculate for your company as we go through the tutorial: Put the company name of the first line,the second line contains the words Income Statement and the third line has for the period ending November 20, 20XX
Normally an income statement is generated from the general ledger, which is a series of accounts for the business. We need to project an income statement before we have even begun to start our business. In a later chapter in the tutorial, you will see how to create an income statement based on actual business transactions that have changed general ledger amounts.
Two Types of Income Statements
There are two kinds of income statements: One for a service business and the other for a company that carries an inventory of merchandise. We will address both of these since some companies are service oriented and others are merchandising businesses.
Since we have now idea what are sales will be, it is best to see what all our expenses are first. Then we can determine what are sales must be in order to meet our expenses. If you go to
Standard Payments for Companies
You can see some of the expenses that are required to set up an income statement for Virtual Enterprise Companies. THE VEC changes these numbers each year, so when you do your calculations, make sure that you download the most current form. I have put these expenses in the two income statements listed in the boxes to the right. Remember , the one on the right is for a merchandising business and the one on the left is for a service business. These particular expenses are the same for both types of companies. Since some of the expenses are based on the number of students in the VE class, we will assume that there 25 students in our class.
To calculate Utilities Expense proceed as follows: $3.50 rate per person for water. 3.50 X 25 = $87.50. For natural gas, the rate is also $3.50 per person per month. 3.50 X 25 = $87.50. The electric bill is calculated as follows. 25 X $35.00 per person per month = $875. The phone bill is $27.50 per person per month for a total of $687.50. High speed Internet access, according to our standard rate table is $350.00 Now lets add up all of these number since they are classified as utilities expense. The total for utilities expense is $2,087.50
| Expenses |
| Item | Cost | Total |
| Water | $3.50 per person | $87.50 |
| Electricity | $35.00 per person | $875.00 |
| Gas | $3.50 per person | $87.50 |
| Phone | $27.50 per person | $687.50 |
| Internet Service | $350.00 per person | $87.50 |
| Total Utilities | | $2,087.50 |
Calculate Utilities Expense for your company at this time and key in the amount on your income statement.
Auto Expense
If you have a company automobile, the cost is $3.75 per gallon. Sixty gallons must be purchased per month for each vehicle for a total of $225.00 per month. The examples below do not have this expense.
Calculate Auto expense for your company at this time and key it into the income statement for your company.
The loan Payment
The portion of our loan payment that is interest each month is an expense. Remember that the amount of our loan is $150,800. In the last lesson, we calculated that the interest at 12% for 10 years came out to $108,825.03 for interest. If we look at our amortization table, we see that the November payment of $2,163.54 is composed of $655.54 toward the principal and $1,508.00 for interest expense.
Write down the costs associated with our business loan: monthly payment, amount paid toward the principal and the interest each month. Record the amount of interest for November on the income statement template.
Rent Expense
Our rent has been calculated by Virtual Enterprise. The amount is $3,750.00
Key in the amount of rent expense on the income statement form.
Business Insurance Expense
Our insurance expense is $32.50 per month per person for a total of $812.50.
Record insurance expense on the income statement form.
Auto Insurance
If our company has an automobile the cost is $250.00 per automobile.
Record this expense if you have and automobile in your business.
Advertising Expense
Advertising expense is directly related to the type of advertising media your marketing department has chosen: print media such as newspapers, magazines; direct mail, television; billboards; radio; etc The target market for both companies is basically the same. One segment of the market is high school and college age students planning an event such as a high school dance, senior proms. The other market segment is composed of people planning weddings. One way to reach the first segment is through advertising in the high school and college newspapers. The other and older group is best reached with traditional newspaper advertising and cable TV. Advertising rates differ based on media and size of the market. Let's assume your marketing department has decided to spend $2,000 per month on advertising.
Record the amount of money you plan to spend on advertising.
Specialized expenses
Each company has certain specialized expenses. One expense incurred by both companies is alterations expense. Tuxedos, bridesmaid dresses, suits and wedding gowns need to be tailored. Our two companies send these alterations out to a tailor. Our cost is estimated to be $1,500.00 per month.
Our office supplies expense is estimated to be about $150.00 per month. Normally we would not just expense out supplies, but for now we are just making estimates. Later on we will learn how to make adjustments to our supplies account.
Record any specialized expanse. Either add a line for the expense to the income statement or key the new expense name over one that you do not plan on using.
Repairs Expense
Certain repairs to office equipment, cash registers, fixtures, etc need to be on occasion, so we will plan on $50.00 per month for both companies.
Record amount if it is in your list of planned expenses.
Miscellaneous Expense
Sometimes there are expenses that do not fit in any of the categories that we have set up. That is what miscellaneous expense is designed for. We are planning $100.00 per month.
Record any miscellaneous expenses on the income statement.
Depreciation Expense
Depreciation is a method of charging off to an expense the wear and tear on equipment and other assets. There are a number of different methods of depreciating an asset. We will use the simplest one, called straight-line. We first determine the value of the asset. Next we determine the useful life of it. We divide by the number of years and then by 12 to determine the monthly amount that can be charged to depreciation expense. To see the value of the assets we need to look back at lesson two to see what the assets are and their value. For both companies proceed as follows.
- Display cases cost $25,000. Assume a life expectancy of 10 years. Yearly depreciation for this asset is $2,500 per year. Monthly depreciation is $2,500/12 = 208.33.
- Display racks cost $20,000. Life of the asset is equal to 10 years, therefore, yearly depreciation is $2,000 and monthly depreciation is $166.67.
- Our $2,000 cash register has a useful value for 5 years, therefore yearly depreciation is $400 and the monthly depreciation is $33.33 per month.
- Our computer cost $1,500. Since computers and operating systems change regularly we will assume a 3-year life value for the asset. The monthly depreciation for the computer is $41.67.
- The software used to operate the computer is also and asset. Years of useful service for the software is also 3 years. Monthly depreciation is $27.78
- The filing cabinet cost $300. Life equal 5 years. Yearly depreciation is $60 and monthly is $5.00.
- Our desk cost $400 and we calculate that this one will do for the next 5 years. Monthly depreciation is $6.67.
- Our desk chair cost $100 when purchased. It will last for 5 years. Yearly depreciation is $20 and monthly is $1.67.
Now let's add up the amounts of monthly depreciation for each asset so that we can come up with the amount for depreciation expense to put on the income statement. 208.33 + 166.67 + 33.33 + 41.67 + 27.78 + 5.00 + 6.67 + 1.67 = 491.12
For the tuxedo rental company, we have another very large asset that needs to be depreciated, the tuxedos that are rented out. The value of this asset is $100,000. Since styles change and the tuxedos get worn out after repeated use, we have determined that all tuxedos will need to replaced in 3 years. This calculates out to $33,333 per year or $2,777 per month. If you look at the second income statement for a service business, you should see the amount of depreciation (491.12 + 2,777.00).
Even though we are not finished with the income statement, let's get started on your own company's one. Use the form provided. Complete the top part of the income statement by writing your company's name, the words "Income Statement" just below and the words "for the period ending November 30" and begin listing expenses and amounts for your own business.
Record any depreciation that you have calculated for your company.
Salary Expense and the Business Contract
Test
Job Title | N0.of Positions | Yearly | Monthly | Totals |
CEO | 1 | 100,000 | 8,333.33 | 8,333.33 |
CFO | 1 | 95,000 | 7,916.67 | 7,916.67
| VP Sales | 1 | 65,000 | 5,416.67 | 5,416.67
| VP Marketing | 1 | 65,000 | 5,416.67 | 5,416.67 |
VP Advertising | 1 | 65,000 | 5,416.67 | 5,416.67
| VP HR | 1 | 65,000 | 5,416.67 | 5,416.67 |
VP IT | 1 | 65,000 | 5,416.67 | 5,416.67 |
Sales Assistant | 5 | 45,000 | 3,750 | 18,750 |
Payroll Admin | 1 | 65,000 | 5,416.67 | 5,416.67 |
Acc Receivable | 2 | 65,000 | 5,416.67 | 5,416.67 |
Acc Receivable | 2 | 65,000 | 5,416.67 | 10,833.34 |
Branch Banker | 1 | 65,000 | 5,416.67 | 5,416.67 |
Web Designer | 1 | 45,000 | 3,750 | 3,750 |
Event Planner | 1 | 45,000 | 3,750 | 3,750 |
Adm Assistant | 1 | 65,000 | 5,416.67 | 5,416.67 |
Marketing Asst | 3 | 45,000 | 3,750 | 9,450 |
HR Associate | 1 | 45,000 | 3,750 | 3,750 |
IT Associate | 2 | 45,000 | 3,750 | 7,500 |
Totals | 25 | | | 119,166.67 |
Now we need to calculate our salary expense. This amount is very important since the VEC makes a contract with your company to deposit this amount in your company account each month. This is called the business contract. The contracts are slightly different for a service and merchandising company. For a service business, VE will give you your salary expense or gross pay for all employees.. This is the gross amount of money given to each employee before deductions. For a merchandising business, you will get the salary expense plus cost of good sold. Let's start with the service business.
To calculate Salary Expense
To find the salary expense you can proceed in a number of ways.
First we need to determine the yearly rate for each person. If you look at the table above, can see the information that you need to calculate Bromley's Tuxedo Rentals Salary Expense.
To calculate your own company's salary expense, click on the link for payroll in the projects box.
The total for the payroll for the month is $119,166.67. This is your salary expense. If you look at the income statement for the tuxedo rental service business you will see this amount listed under salary expense.
Record your company's salary expense. Click on the links in the projects box for the week
- How to make a business contract.
- Check out the video on how to make a business contract.
- Use the payroll template to complete your own payroll
Payroll Taxes
In addition to the salary expense, the company must calculate payroll taxes expense. The employer must match the FICA and Medicare tax withheld from each employee's paycheck and also pay state and federal unemployment taxes. The FICA rate is .062. Medicare is .0145. FUTA is .008. SUTA is .034 and state employment training is .001. Now let's multiply each of these percentages times the total payroll of 111,228.
| Account | Percent | Amount |
| FICA | .062 | 7,388.33 |
| FICA | .062 | 7,388.33 |
| Medicare | .0145 | 1,727.92 |
| Medicare | .0145 | 1,727.92 |
| FUTA | .008 | 953.33 |
| SUTA | .034 | 4,051.67 |
| Training | .001 | 119.17 |
| Totals | .196 | 23,356.67 |
Record your company's payroll taxes expense.
Other Expenses
The tuxedo rental business has large expense involved with dry cleaning after each tux is returned. According to our research, dry cleaning costs for both the tuxedo ($12.00) and the shirt($3.00) is $15.00.
We need to calculate the approximate number of tuxedos that we will rent each month
Our
VE sales contract is for 119,166. If we plan to charge $125 to rent a tuxedo, shirt, tie, and shoes for $125 then we come up with 953 tuxedos rented. (119,166 /125)
If you look at the income statement our expenses are $157,750 before dry cleaning expense, which give as a loss of around $38,582.79 (119,166.67 - 157,749.46)
If we divide the loss by 125 we can see how many additional tuxedos we need to rent to just cover our expenses (38,582.79/125) = 308 additional tuxedos
To estimate the number of tuxedos rented, we add(953+308) = 1261 tuxedos rented each month
To calculate the dry cleaning costs, multiply 1261 times $15.00 the cost to clean each one.
Our cost for dry cleaning the tuxedos is therefore, $18,915
Payroll Taxes and Total Expenses
Now if we add up these amounts from the table above, we can determine the payroll taxes expenses that need to go on the income statement. The total is 23,356.67. Now it is time to total up all the expenses. The total of all expenses for the tuxedo rental business after calculating dry cleaning expense is $176,664.46. That means that we will need $176,664.46 in sales just to cover our expenses and gives us no profit.
Record payroll taxes expense and total expenses for your company on your income statement form.
AS you can see from the second service income statement for The tuxedo rental business, the VE contract does not cover the expenses and is short by $57,497.79 for the month. You can see that the net income of $57,497.79 is a net loss, therefore it is in red and has brackets around the amount.
In the next chapter we will examine what to do to erase this deficit.
Get the business contract information worksheet and business contract application from the VE web site. Fill them out, make copies for yourself and mail them to the Virtual Enterprise Center before the third week in October if you want to have the contract money deposited into your company bank account for the month of November.
Bromley's Formal Wear Calculations
If your company carries merchandise there is additional money available to you from the Virtual Enterprise Center since a merchandising business has a very large expense called cost of merchandise sold. This is the amount of money it costs you to buy the merchandise that you sell. For example, in our formal wear business, the company must buy an inventory of tuxedos, men's and women's suits, bridesmaid dresses, bridal gowns, dress shirts, ties, etc. Virtual Enterprise will pay your company salary expense plus a portion of the cost of goods sold. Here is how to calculate the the part of cost of goods sold paid to your company by the Virtual Enterprise Center.
- Click on the "Bizstats" link on this page.
- The link takes you into the S Corporation section.
- Select type of industry. For example, if you select retail, then you will see another page, that allows you to select the specific retail industry.
- After clicking on the one that matches up with your company, look for the cost of sales percentage. These amounts change slightly. We have a retail clothing and accessories business. The percentage now for S corporations is 51.07% as of the date of this material.
- Now multiply .5107 times the salary expense of $119,166.67. You should get $60,858.42.
- Now add this amount and the salary expense to see what your business contract total should be. 119,166.67 + $60,858.42 = $180,025.09
- Write it down. Cost of goods sold percentages vary greatly from one industry to the next. Make sure when doing your own company's income statement that you select the correct industry.
- The $60,858.42 is added to our sales amount on the income statement for a total revenue of 180,025.09.
If you look at the second income statement for a merchandising business, you will see this amount.
The cost of goods sold number is 180,025.09 times .5107 = 91,938.81
Gross Profit is cost of good sold subtracted from total revenue (180,025.09 - 91,938.81 = 88,026.28) or 180,025 times .4893 (1.00 - .5107 = .4893)
The total expenses for the formal wear business is 154,972.46
if we subtract the total expenses from the gross profit , we get a loss of 66,886.18
Get the business contract forms from the VE office, fill them out, make copies for yourself and mail them in before the third week in October in order to receive this money in November.