In most organisations, the board or senior management requires the accountant to produce a monthly profit and loss account and income statement, so that the organisation’s performance against set budgets and expected forecasts can be gauged.
A monthly management accounting reporting pack does not only include the monthly income statement, but a range of other useful reports too. However, an income statement does constitute the bulk of the reporting.
In a nut shell, through a certain set of activities and for a given period, usually a month, we determine: the revenues generated by the business, the costs incurred in the production of such revenues commonly known as ‘cost of goods/services sold’ and the costs incurred to provide support to such revenue generation and goods/services production. This cost is sometimes referred to as the central overheads’ costs or support functions’ costs or the service-centre costs.
Most businesses will use a “Chart of Accounts” in their accounting systems (may it be: Sage, SAP, Oracle, SUN, Viztopia etc.) to classify and record various types of transactions involving differing kinds of assets, liabilities, capital, revenues, and costs.
A Chart of Accounts or COA, is a list of all nominal ledger accounts that a business intends to use to record its business transactions. This list of accounts can be in the shape of numbers, alphabets or alpha-numeric values.
So, to give an example, our full COA might range between the numbers 0001 and 9999 and within this range, we can have multiple ranges, each representing an asset, liability, capital, revenue or costs type. As an example, the range 5000-5999 might only represent different kinds of revenue streams for a business and the range 1000-1999 might only refer to all fixed assets held by the business.
You will not be able to understand the income statement (which is what you are essentially trying to produce), unless you understand the Chart of Accounts. The income statement is basically reading all data held in the COA ranges relating to revenues and costs for a given month/period.
Once you have understood the division of the COA, you can then truly appreciate the monthly income statement template that your organisation already has in place. If you are assigned the task to build one from scratch, then this guide is not for you.
A vast number of organisations produce their monthly management accounts in Microsoft Excel. The income statement, depending on the business, will be divided into multiple sections.
- Cost Of Goods/Services Sold
- Gross Profit
- Selling Expenses
- Marketing Expenses
- Contribution To Central Overheads
- Central Overheads Recharge
Each of the above sections of the income statement will be made up of a number of nominal codes from the COA. As an example, the revenue section of the income statement in MS Excel might be pulling together/summing the data from codes 5000-5999 range from the main accounting software, for a given month. How does excel do that?
Well, most organisations use some sort of intermediary excel tool to pull data out from the main accounting software (where a record of transactions sit) onto excel. That is why it is imperative to know your business specific COA, so that you know what makes up revenue and what makes up, lets say, cost of goods sold.
Before you even open up your business’s monthly reporting pack, of which the income statement template is the most important, you need to understand your Chart of Accounts.
- Most management accounts’ packs/templates, are made in excel
- Transactions are recorded using some accounting software, such as Sage, Sun, Sap etc.
- The monthly income statement template is divided into sections, such as Revenue, Cost of Sales, Gross profit etc. Each section is reading a number of nominal codes from the main accounting software and summing them up for a given periodic month in the ms excel reporting templates.
- This summing/collation of information into excel from the accounting software, using nominal codes, is usually done with the help of an excel Add-on tool.
The Production Process
Broadly speaking, the finance department of almost all businesses, ranging from small and medium to big publicly listed companies, can have the following sub-departments, either separately or combined, within the main finance function:
· Sales Order Processing – SOP
· Sales Ledger
· Credit Control
· Purchase Ledger
· Management Accountancy
· Financial Accountancy
While this is just a snapshot of the process, IAIS can provide a bespoke complete reporting system based on your existing accounting software solution that accurately and meaningfully represents what is happening in your business to allow you to make better decisions and to know what is going on in the figures between annual accounts.