Income. The first category in a Profit & Loss report is income, which is simply the revenue your company generates by selling products and services to your customers. Regardless of how you earn revenue (selling services, products, or even charging fees), the Profit & Loss report shows all the income accounts in your chart of accounts and how much you brought into each, as shown in Figure 17-1.

Figure 17-1. The Income section at the top of the Profit & Loss report lists the accounts that represent the money you make when you sell to customers. Frustratingly, most companies have to subtract the cost of goods sold from income to figure out how much they really brought in. Cost of goods sold usually includes the cost of materials and labor to build products, or the cost of the products you purchase for resale.

Cost of Goods Sold. Unless you gather rocks from your yard and then sell them as alien amulets, the products you sell carry some initial cost. For example, with products you purchase for resale, the cost is the original price you paid for them, the shipping costs you incurred to get them, and so on. In the Profit & Loss report, Cost of Goods Sold adds up the underlying costs associated with your product sales.

By the way, if you don’t sell inventory items, you might not have a Cost of Goods Sold section. Most of the time, Cost of Goods Sold relates to the costs of buying materials and building the products you sell. But depending on the type of business, Cost of Goods Sold can include labor costs, product shipping, an agent’s percentage, and so on.

Gross Profit. Gross profit is the profit you make after subtracting the Cost of Goods Sold. For example, if you sell equipment for $100,000 and you paid $60,000 to purchase that equipment, your gross profit is $40,000. The box below explains how to see whether your gross profit is in line with your industry.

Expenses. The next and longest section is for expenses—all the things you spend money on running your business, sometimes called overhead. For example, office rent, telephone service, and bank fees all fall into the overhead expense bucket. The name of the game is to keep these expenses as low as possible without hindering your ability to make money.

Figure 17-2. You can use the percentages in the “% of Income” columns to analyze company performance in other ways. For example, when you’re trying to find places to cut costs, look for expense accounts that take up a large percentage of your income. Or compare the percentage of net profit to the average for your industry.

Net Ordinary Income. QuickBooks uses the term Net Ordinary Income to describe the money that’s left over after you pay the bills. You’ve probably also run across this measure referred to as net profit or net earnings. Figure 17-3 shows the expenses and net ordinary income portion of a Profit & Loss report.

Figure 17-3. If your company makes more money than it spends, your net income (also called net profit) is a positive number. Despite the report’s name, QuickBooks doesn’t label your result a loss when your company spends more than it makes. Instead, a loss shows up as a negative number for net income.

Other Income/Expense. Income and expenses that don’t relate to your primary business fall into the Other Income/Expenses category. The most common entrants are the interest income you earn from your savings at the bank, the interest you pay on your loans, or bad debt. In this category, income and expense are bundled together and offset each other. The result is called Net Other Income. For example, if you have only a smidgeon of cash in savings but a honking big mortgage, Net Other Income will be a negative number.

Net Income. At long last, you reach the end of the report. Net Income is the money that’s left after subtracting all the costs and expenses you incur. If Net Income is positive, congratulations—your company made money! When Net Income is negative, your expenses were more than your income, and something’s gotta give.

Profit & Loss Detail. Only the tiniest of companies—or the most persnickety of bookkeepers—uses this report regularly. The Profit & Loss Detail report is a year-to-date report that includes a separate line for every service and product you sold, every other charge that produced revenue, and every item on every bill you paid. It comes in handy when the numbers on your standard report seem a bit off and you want to find the culprit.

Profit & Loss YTD Comparison. This report pits the Profit & Loss results for two periods side by side: the current month to date and the year to date. You might find a reason to run this report, but comparing a period to its predecessor from the previous year usually shows business trends more clearly (see the next report), especially for seasonal businesses such as retail or landscaping.

Profit & Loss Prev Year Comparison. If you own a gift shop, you know that sales are highest around the holidays. If you compare the last quarter of one year to the first quarter of the next, the Profit & Loss report would look pretty grim. Sales would be down and possibly exacerbated by returns from holiday purchases. To see whether your business is growing, compare your previous year to the current year with the report shown in Figure 17-5.

Figure 17-5. The Profit & Loss Prev Year Comparison report sets the Dates box to “This Fiscal Year-to-date” and shows your results for the current year in the first column and those from the previous year in the second column. If you want to see where growth is strong or stagnant, include the columns that show the change in dollars or percents (Understanding the Balance Sheet). Right after your fiscal year ends, you can change the Dates box to “Last Fiscal Year” to compare the year you just finished to the one before.

Profit & Loss by Job. If you suspect that some of your customers and jobs are less profitable than others—and you want to learn from your mistakes—choose the Profit & Loss by Job report. In this report, each of your customers and jobs appears in its own column so you can compare how much profit you made for each. The box on Understanding the Balance Sheet tells you how to compare apples to apples.

Profit & Loss by Class. When you use classes to track performance for different business units or locations, use this report to produce a Profit & Loss report for each business entity. Each class has its own column. If you’d rather generate a Profit & Loss report that shows only one class, modify the report to filter for that one class (see Filtering Reports). Unclassified is the label for last column in this report, which represents all the transactions that don’t have a class assignment.

Profit & Loss Unclassified. Before you pretty up and print your class-based Profit & Loss reports, run this one to see the numbers for transactions without class assignments. Depending on how you use classes, unclassified transactions might be perfectly acceptable. For example, if you track income by partner, overhead expenses aren’t related to individual partners. You shouldn’t see any non-zero values for income accounts, but you might see expense accounts with non-zero values.

Assets. Assets are things of value that a company owns, such as equipment, land, product inventory, accounts receivable, cash, and even brand names. On a balance sheet, you want to see significantly more money in the asset section than in the liabilities section.

Figure 17-6. The Balance Sheet report earns its name because of math, not magic, and this is the formula that puts the balance into a balance sheet: Equity = Assets—Liabilities. As you buy more or borrow more, the value of your equity changes to make up the difference.

Liabilities. Liabilities include accounts payable (bills you haven’t yet paid), unpaid expenses, loans, mortgages, and even future expenses, such as pensions. Debt on its own isn’t bad. It’s too much debt that can drag a company down, particularly when business is slow. Debt payments are due every month whether your business produced revenue or not.

Equity. Equity on a balance sheet is the corporate counterpart of the equity you have in your house. When you buy a house, your initial equity is the down payment you make. But both the increasing value of your house and the decreasing balance on your mortgage contribute to an increase in your equity. Equity in a company is the dollar value that remains after you subtract liabilities from assets.

Balance Sheet Standard. This report includes every asset, liability, and asset account in your chart of accounts—unless the account has a zero balance. QuickBooks automatically sets the Dates box to “This Fiscal Year-to-date”, so the report opens showing your balance sheet for the current date. If you want to see the balance sheet at the end of a quarter or end of the year, in the Dates box, choose This Fiscal Quarter, This Fiscal Year, or Last Fiscal Year.

Balance Sheet Detail. Printing the Balance Sheet Detail report is a good way to use up the last of your old printer paper, but it isn’t that useful for managing your business. This report shows the transactions over a period in each of your asset, liability, and equity accounts. Should a number on your regular balance sheet report look odd, use this report to verify your transactions. Double-click the value for transactions to open the corresponding window, such as Enter Bills.

Balance Sheet Summary. If you want to see the key numbers in your balance sheet without scanning past the individual accounts in each section, this report shows subtotals for each category of a balance sheet, as shown in Figure 17-7.

Balance Sheet Prev Year Comparison. If you want to compare your financial strength from year to year, this report has four columns at your service: one each for the current and previous year, one for the dollar change, and the fourth for the percentage change.