The next section down, directly underneath the Income section and mostly in the case of folks who sell Products is the Cost of Goods line. Reports in most small business accounting software will display this as COGS
This line represents the actual costs (COGS) associated with the Products you sold in the period you report from your small business accounting software. The objective of this line is to assist companies determine the gross margin/profit (the gross profit realised after acquisition of the stock).
The gross margin (a.k.a gross profit) is calculated by Income minus COGS. Gross Margin is often expressed as a percentage and to calculate the gross margin and express it as a percentage just divide the Gross Margin by the value of sales you made in that period. Now if you’re a Services Business life is a little more complex if you want to determine the Gross Margin you make on Services (and you should). The reports in some small business accounting software systems will help you determine this.
Visit the Small Business Heroes channel on Youtube for videos explaining the Profit and Loss and other accounting elements. It is standard practise to the Operating Expenses (business running costs) directly below the COGS line. The business running costs are known as the Operating Expenses and they tell us what was spent where and when.
Expenses are often categorised into sections representing key functions such as Sales, Admin, R&D and other departments. As you can see these sections represent major functions or centres of activity in a business. These rows detail the amount of money spent in a given period.
The balances in these sections are derived from Expense Accounts and it’s really important that you know and understand that there are two major types of Expense in any business. These are Fixed and Variable expenses.
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