A minimum managerial  bookkeeping skills.

No, don't worry, you're not on a site about accounting. However, to read the basic accounting documentation and “Understanding Figure”, I believe that this minimum accounting skills are necessary to have you mastered.

Many managers like shortcuts, but they often lead to the completely erroneous conclusions.  Profit and loss account is showing a profit company for a specific period (mostly per month, quarter, half a year, year). Frequent manager’s opinion shortcut above this statement is:

  How to understand?

Sales are at the beginning of the profit and loss account statement. When are these revenues posted by accountant? If a company sells the goods to the customer (or the service). It does not change the fact that the customer for the goods (or services) did not pay until now! The company can this revenue counted against the sales over a given period. Note that company in fact did not receive any money. If everything goes as expected, the company waiting for this real money from 14 days up to a month! If the things are going wrong, the money will arrive with great delay, or do not arrive at all. 

Cost lines of the profit and loss account.

The company reported costs might not correspond to the expenses of the given period. The cost in the profit and loss account are in fact those, which incurred in achieving the revenue posted during a given time period. And it is also one of the main tasks of the accountant. Correctly assign all costs incurred in achieving sales.

Principle of matching costs and revenues is a key principle to do this, so you can understand the numbers not only in this statement.

A few examples:

  • The company produces machines, where the transmissions must be complemented by oil. The purchase this in January of the current year. The machine, however, is produced until March and sale of the machines will execute in April. On the basis of the principle of cost and revenue assignment the company accounts for costs up to when the machine is sold. 
  • Company selling empty CD purchases in August a larger number of CDs, to reach the quantity discount (about how much should be quantity discount, to make this company paid off we speak in another article). CDs will resell to customers. However, of these costs does not booked in August, but up to the moment when the CD had been sold. 

From the illustrated principle of course you quickly understand, that this activity also influencing f.e.  the calculation the correct tax.  These operations also often not caused an effective flow of finances. This watch another type of statement – statement of Cash Flow.

The accounting officer simply can't just simply add up the money received and issued. They must carefully decide which cost is belong for whom the sales. How exactly do they do, so the exact profit and losses shall be measured, how profitable are goods and services that the company produces and sells. One thing is again from the above mentioned clear. Here is projected the subjective point of view (even if though to be maximally objective) and these numbers and the results contain mostly some distortion. 

However, this statement is very important for many managers of the company: The CEO needs to know how profitable his company is in a given period in order to take a right strategic decision. The Business Manager needs to know the profitability of individual goods and services, to be able for example, to work better with the prices, the quantitative discounts and also with payment conditions of customers. The marketing manager needs to know the profitability of each product, following the preparation of marketing campaigns. Production manager for example needs to decide on whether to cooperate with other suppliers or produce sub components itself. And we could proceed ahead at this consideration.

Profit = always an estimate. The estimate cannot be spending.

How much can we afford to spend (for the account receivables, the purchase of materials or goods to pay employees ...) are quickly be shown at the statement of Cash Flow.