Accounting theory and practice, Volume 1 (of 3)

by Roy B. Kester

Following this trading section comes the formal statement of operating expenses which are usually classified for purposes of information into the groups: Selling Expenses, General Administrative Expenses, and Financial Management Expenses. Under each one of these groups should be listed the detailed items. Thus, under the selling expense group should be shown such items as salaries to salesmen; the traveling expenses incurred by them; the cost of publicity, advertising, and so forth; the sales management expense; and the delivery expenses, although these expenses are sometimes set up in a group by themselves.

The student will note that under the head of selling expenses are grouped all of the direct costs incurred in making sales.

Under the general administrative expenses should be shown such items as office salaries, stationery and supplies, postage, telephone and telegraph, light, heat, insurance, depreciation, and all other items which cannot be charged to definite departments of the business but must be borne by the business as a whole.

Under financial management expense should be listed the various items of expense which represent the financial activity of the business as related to its major purposes and which are operating financial expense items. Here will be shown such items as interest on money borrowed for operating the business; sales discounts granted customers in order to secure cash payments from them at an earlier date than the limit of the normal credit period allowed them; collection costs, and so forth.

A final section of the operating portion of the profit and loss statement lists the items of income arising out of the management of the working capital finances of the business. Interest received on customers’ notes and on cash balances in the bank, and purchase discounts, are usually the only items of income under this head.

The difference between gross profit on sales and the sum of these operating expenses minus the financial income, is the operating profit of the business, sometimes called Net Operating Profit.

The section following this is devoted to the marshaling of the items of Non-operating Income and Expense. Whichever of these two groups is the larger is set up first, and from its total is deducted the total of the other group. The net amount is then shown extended under the item of net operating profit, to which it is added if it is a net income item and from which it is subtracted if it is a net expense item. The resulting figure is the Net Profit for the period.

Occasionally there are extraordinary items of profit or loss not to be classified under any of the above heads, which have to be shown in additional sections of the profit and loss statement. These are matters which will be taken up later.

It should be noted that the above paragraphs outline a simple statement of profit and loss for a commercial or trading business as distinguished from an industrial or manufacturing enterprise, the statement for which is somewhat more complex even in its general outlines.

Algebraic Content of the Profit and Loss Statement.—An algebraic presentation of the profit and loss statement is oftentimes valuable. The cost-of-goods-sold portion becomes: