5.1 Definition of Terms

At the end of each accounting period the balances in the ledger are used to prepare the final accounts, which show how much profit the business made and what it owns and owes. The first of these, the income statement, depends on a small set of terms: sales, cost of goods, gross profit and net profit or loss. A food and beverage manager who understands these terms can read the monthly results, judge whether menu prices cover costs and explain the figures to owners, auditors and KRA. Example: the manager of a hotel restaurant in Mogotio compares this month's gross profit with last month's to see whether a rise in cooking oil prices has reduced margins.

Sales

Sales (turnover or revenue) are the income a business earns from selling goods and services in its normal trade, such as meals, drinks, rooms, conference packages and outside catering. They include both cash and credit sales, measured when the goods or services are delivered. Goods returned by customers (returns inwards) and allowances given are deducted to arrive at net sales, which is the figure used to calculate gross profit. Example: a café with total sales of Ksh 1,250,000 and returns inwards of Ksh 10,000 has net sales of Ksh 1,240,000.

• Cash sales: Paid for at the time of sale by cash, card or mobile money.
• Credit sales: Billed to customers who pay later, such as corporate and conference clients.
• Returns inwards: Goods returned or allowances given, deducted from sales.
• Net sales: Sales minus returns inwards.
• Exclusions: VAT collected and the sale of non-current assets are not part of sales.

Gross profit

Gross profit is the profit earned from trading before deducting the running expenses of the business. It is the difference between net sales and the cost of goods sold, and it shows how well a business buys, prices and controls its food and beverage stock. Gross profit is often expressed as a percentage of sales (the gross profit margin), which in food service is closely watched alongside the food cost percentage.

Gross profit = Net sales - Cost of goods sold
Gross profit margin = Gross profit ÷ Net sales × 100

Example: a bar has net sales of Ksh 900,000 and cost of goods sold of Ksh 360,000.

Gross profit = 900,000 - 360,000
Gross profit = Ksh 540,000

Gross profit margin = 540,000 ÷ 900,000 × 100
Gross profit margin = 60%

Net profit/Net loss

Net profit is what remains after all expenses of running the business have been deducted from gross profit and any other income added. If expenses are greater than gross profit plus other income, the result is a net loss. Net profit belongs to the owner and is added to capital, while a net loss is deducted from capital. It is the best single measure of overall performance for the period.

Net profit (or loss) = Gross profit + Other income - Expenses

Example: a juice and snack kiosk earns a gross profit of Ksh 410,000 and commission of Ksh 15,000, and pays expenses of Ksh 480,000.

Net result = 410,000 + 15,000 - 480,000
Net result = 425,000 - 480,000
Net loss = Ksh 55,000 (expenses exceed gross profit plus other income)

• Other income: Commission received, rent received, discounts received and interest earned.
• Expenses: Wages, rent, electricity, fuel, repairs, advertising, depreciation and bad debts.
• Net profit margin: Net profit ÷ Net sales × 100, showing how much of each shilling of sales is kept as profit.
• Effect on capital: Profit increases capital; loss reduces it.

Cost of goods

Cost of goods, more fully cost of goods sold (COGS) or cost of sales, is the cost of the food, beverages and other stock actually used to make the sales of the period. It is not simply the purchases, because some stock bought this period is still in the store, and some stock used was bought last period. Carriage paid on goods bought (carriage inwards) is added to purchases and goods returned to suppliers (returns outwards) are deducted.

Cost of goods sold = Opening stock + Net purchases - Closing stock
Net purchases = Purchases + Carriage inwards - Returns outwards

Example: a restaurant has opening stock of Ksh 150,000, purchases of Ksh 500,000 and closing stock of Ksh 100,000.

Cost of goods sold = 150,000 + 500,000 - 100,000
Cost of goods sold = 650,000 - 100,000
Cost of goods sold = Ksh 550,000

• Opening stock: Stock on hand at the start of the period, the previous period's closing stock.
• Purchases: Goods bought for resale or use in food and drink production.
• Closing stock: Stock counted and valued at the end of the period, at the lower of cost and net realisable value.
• Food cost percentage: Cost of goods sold ÷ Net sales × 100, a key control figure in kitchens and bars.

Trading profit and loss account

The trading, profit and loss account is the final account prepared at the end of a period to calculate the profit or loss of the business. It has two parts. The trading account compares net sales with the cost of goods sold to find gross profit. The profit and loss account then adds other income and deducts all expenses from gross profit to find net profit or net loss. Under current reporting standards the same information is presented as the income statement (statement of profit or loss), prepared in vertical form.

• Trading section: Sales, returns inwards, opening stock, purchases, carriage inwards, returns outwards and closing stock, giving gross profit.
• Profit and loss section: Gross profit, other income and all running expenses, giving net profit or loss.
• Period covered: Headed "for the year (or month) ended" a given date, because it covers a period, not a single day.
• Nominal accounts closed: Income and expense accounts are transferred to it and start the next period at zero.
• Result transferred: Net profit or loss is transferred to the capital account.

5.1.1 Prepare Income Statement

The income statement, also called the statement of profit or loss, summarises the revenue, expenses and profit or loss of a business for a specific period. It shows the operating efficiency and profitability of restaurants, caterers and hotel food services, and it helps managers control costs, set prices and complete tax returns. It is prepared from the balances in the trial balance, adjusted for closing stock and other year-end items.

Steps to prepare an income statement

1. Write the heading: Name of the business, "Income statement for the year ended" and the date.
2. Calculate net sales: Take total sales from the sales account and deduct returns inwards.
3. Calculate net purchases: Add carriage inwards to purchases and deduct returns outwards.
4. Calculate cost of goods sold: Add opening stock to net purchases and deduct closing stock.
5. Find gross profit: Deduct cost of goods sold from net sales.
6. Add other income: Add commission received, rent received and similar income to gross profit.
7. List and total the expenses: Show each running expense, including depreciation, and add them up.
8. Find net profit or loss: Deduct total expenses from gross profit plus other income, and label the result clearly.

Worked example

The following balances were taken from the books of a hotel restaurant in Navakholo for the year ended 31 December 2025: sales Ksh 4,860,000; returns inwards Ksh 20,000; opening stock Ksh 210,000; purchases Ksh 1,950,000; carriage inwards Ksh 30,000; returns outwards Ksh 40,000; closing stock Ksh 180,000; commission received Ksh 45,000; salaries and wages Ksh 1,320,000; rent Ksh 360,000; electricity and water Ksh 240,000; cooking gas Ksh 150,000; repairs Ksh 85,000; advertising Ksh 60,000; depreciation of equipment Ksh 120,000.

Income statement for the year ended 31 December 2025

Workings:

Net purchases = 1,950,000 + 30,000 - 40,000
Net purchases = Ksh 1,940,000

Cost of goods sold = 210,000 + 1,940,000 - 180,000
Cost of goods sold = 2,150,000 - 180,000
Cost of goods sold = Ksh 1,970,000

Gross profit = 4,840,000 - 1,970,000
Gross profit = Ksh 2,870,000

Net profit = 2,870,000 + 45,000 - 2,335,000
Net profit = 2,915,000 - 2,335,000
Net profit = Ksh 580,000

Key ratios from the statement:

Food and beverage cost percentage = 1,970,000 ÷ 4,840,000 × 100
Food and beverage cost percentage = 40.7%

Gross profit margin = 2,870,000 ÷ 4,840,000 × 100
Gross profit margin = 59.3%

Net profit margin = 580,000 ÷ 4,840,000 × 100
Net profit margin = 12.0%

Importance of the income statement in food and beverage management

• Measuring profitability: Shows whether the outlet earned a profit and how large it was.
• Cost control: Food cost and expense figures reveal where money is being lost, such as waste or overstaffing.
• Pricing decisions: Gross profit margins show whether menu prices cover the cost of ingredients.
• Trend analysis: Comparing periods shows seasonal patterns and rising input costs.
• Budgeting and forecasting: Past results are the base for next year's budget.
• Tax compliance: Net profit is the starting point for income tax returns to KRA.