Like the balance sheet or profit and loss statement, the income statement is one of the reports that companies of all sizes should have an idea how to utilize. Here’s a breakdown of an income statement to know what they look like and which information should be included.
What is an income statement?
This type of statement, or report, shows how well a company or organization performed during a specific period of time. It is based on income coming in and spending going out. It shows very clearly if the company had net income or net loss. It may go by other names, including:
- Profit and loss statement
- Statement of income
- Statement of revenue and expense
- Operating statement
- Statement of operations
“An income statement shows your bottom line and whether your business is profitable over a period of time” explains Jo-Ann Yuen, a Chartered Accountant with 20+ years experience with multinational corporations and start-ups and the VP of Finance for Nav. “Profit is defined as revenue less expenses. It can be likened to household finances, where ideally the income or salary from work performed exceeds the expenses going out.”
An income statement may be required as part of your operation as a public company or as part of a corporation. The Securities and Exchange Commission (SEC), for example, lists an income statement as just one of the forms needed to be provided, since your net income can affect owner’s equity and other stock-based compensation.
What items appear on the income statement?
Things that you’ll see on an income statement include the following:
One half the data included on an income statement is the income. In this case, it’s the revenue that is recorded, specifically for goods sold or services rendered. Don’t confuse revenue with receipts, which is a record of money that has come into the company for goods or services. Once a sale is made, it becomes part of accounts receivable and is considered an asset; it’s also considered revenue for the period in which it is earned.
Within the income category, there are a few subcategories. These include:
- Sales – Goods or services that have been sold or delivered, even if they haven’t been paid for yet.
- Royalties, rents, and fees – Payment for non-tangible items, such as use of property, services rendered or ordered, and licensing costs.
- Non-operating income – Additional pre-tax income and revenue earned outside the course of regular business. This may include interest on savings or investments.
- Gains – Usually made when something is sold for money, gains are considered income. This includes selling off property or a fleet vehicle.
These together make your gross sales, but you’re not done yet! After discounts, refunds, and returns are taken out, this is the true revenue number, or your net sales, which is listed as a separate line on the income statement.
Now comes the most detailed part of a typical income statement. Expenses can include a variety of categories, of which a few are listed here:
Operating expenses – In addition to the cost to make and sell the goods, there are overhead costs. These are typically called operating expenses, or the cost to do business.
These can be broken down further into selling expenses, such as marketing, travel, sales bonuses, and anything that helps get products sold. There will also be administrative expenses, which don’t directly lead to sales, but are necessary for running the company. These include rent, paper, utilities, and the salaries of non-sales employees.
There are non-cash expenses here, too, including depreciation on business property or machinery and amortization on a building. Income tax expense may sometimes be put here, too.
Finally, non-operating expenses need tallied. Paying interest on debt, for example, would be an expense that is outside the scope of doing business but needs to be recorded. If an asset was sold at a loss, it is considered in this section, as well.
Cash flow/net income (or net loss)
After you have recorded your income (sales) and your expenses, you can figure out the difference between the two. Taking the expenses from your income will get your net income for the accounting period. If the number is negative, you have a loss. If it is positive, you have made a profit.
Another key number to know is your gross profit. By taking your net sales and subtracting the cost of goods sold, you can see just how much money each widget or service you offer will earn you. Then, it’s easier to see how your other administrative expenses or non-operating expense should be controlled to keep you profitable.
All of these figures are important to know for a number of purposes in your business, including when you apply for a loan. Nav’s Business Loan Builder plan can help you get set up and see where you stand before applying.
How do I make a basic income statement?
One of the easiest way to create your own is to use an income statement template. These have spaces for you to fill in the numbers for income and expenses, then will figure out the cashflow number for you. Provided you have kept good records and know all of your spending and sales to the penny, this is a very simple way to get an accurate net income or loss number for any accounting period. You can also adapt it somewhat to your needs, including making any line item a percentage of total sales, a format called vertical analysis.
Tips on how to read an income statement
If you have used a single-step income statement, you will just have income and expenses, and it is one of the easier reports to read. Some companies may choose a multi-step income statement, which is somewhat more complex, but the end goal is the same.
To get the most out of an income statement, it may be helpful to look at individual categories and see how they contribute to the whole. If you experienced an unprofitable quarter, for example, you can look to the expenses section and see how the numbers in each category compared to previous quarters. Was there a dramatic increase? Were there new categories added? If there wasn’t a substantial change in expenses, then you know that the problem lies with the revenue section. Taking a peek at a comparative income statement may provide clues to what went wrong.
Income statements make it easy to answer the question, do we need to make more money? Or should we cut expenses? The income statement example we provided, in conjunction with other forward-looking statements, can help you formulate a plan toward a more profitable quarter.