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Understanding the Income Statement

Your income statement is one of the most important documents your business produces. However, if you are the owner of a new business, or if you aren’t familiar with this type of statement, preparing and interpreting your Income Statement can be challenging.

What is an Income Statement? 

An income statement, which may also be referred to as a “profit and loss statement,” is an important financial report that communicates your business’s financial performance over a period of time. This statement includes information about the money that came into your business during a given period, the expenses your business incurred during that period, and the total amount of profit or loss after all expenses were paid. 

Sections of an Income Statement 

In most cases, your income statement will be divided into various sections, including Revenue, Operating Expenses, and Taxes. Within each section, smaller subsections exist to provide more detailed information. The final line on the statement provides your net profit or loss, which is calculated as the difference between your revenue and all of the expenses paid to earn that revenue. 

Income statement statements vary from business to business, although in general, the Income Statement should include the same basic information. Most Income Statements will include the following lines: 

  • Heading – At the top of the statement, you will find a heading that provides the name of your company and the period of time the statement covers. 
  • Revenue – This begins the section of the statement that provides details about revenue earned during the period. 
  • Gross Sales – This line of the statement tells you the value of all sales made during the period before any deductions for expenses. 
  • Returns and Allowances – This include the cost of any goods returned by customers or discounted by your company. 
  • Net Sales – This is calculated by subtracting the value of Returns and Allowances from your Gross Sales. 
  • Cost of Goods Sold – This line lists the total wholesale cost of all of the goods you sold during the period. 
  • Gross Profit – This is calculated by deducting the Cost of Goods Sold from Net Sales. 
  • Operating Expenses – This begins the section of the income statement that includes all of the expenses your company paid to operate during the period in question.
  • General Administrative – This section of the document includes all of the administrative expenses paid during the period, including office supplies, utilities and more. At the end of this section, all general administrative expenses are totaled. 
  • Depreciation and Amortization – Under this heading, any expensive assets your business is currently depreciating will be listed, along with the total amount of depreciation for the period. 
  • Total Operating Expenses – This section of the income statement provides the total of your operating expenses for the period, including depreciation, administrative expenses and advertising expenses. 
  • Operating Income – This is the amount of income left over after all of your operating expenses are deducted from your gross profit.
  • Nonoperating Income – This section includes all of the income you earned outside of your standard operations, such as by the sale of assets or investments. 
  • Nonoperating Expenses – This include expenses you paid that were not related to the operations of your business; these expenses may be related to earning nonoperating income. 
  • Income before Taxes – The value on this line is calculated by adding your Operating Income and Nonoperating Income and then subtracting your Nonoperating Expenses. 
  • Taxes – This section includes all of the taxes your business paid during the period, including prepaid income tax and payroll taxes. 
  • Total Net Income – This is the final line on your income statement. It is calculated by subtracting your total Taxes from Income before Taxes. If your expenses for the period exceeded your income, this value will be negative, representing an overall loss. 

Note: In some cases, an income statement will have more than one column so that you can compare income and expenses from different periods. 

Seek the help of an Accounting professional (preferably a Certified Public Accountant) 

Preparing an income statement is no easy task, and interpreting it can also be taxing for many business owners. However, business owners can simplify this process by allowing an accounting professional to help with their income statement and the other financial reports the business produces. A reputable accounting professional will not only ensure that your business income statement is accurate, but the professional will also be able to help you interpret these statements so that you may use the information to boost your business’s future profitability.

Contact us with any questions about income statements and to get one hour of consulting services for free.

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