An income statement is a financial report that shows how much money comes in and out of a business during a period of time—represented as a list of revenue, income and expenses, with a net profit or loss at the end of the report. A company’s income statement is one of several reports used to report its overall financial health to investors, creditors and auditing agencies.
We’ll explain what goes into an income statement and its uses in this article.
What’s Included in an Income Statement
After you’ve started your business and have been operating for a while, you may want to put together an income statement to help assess how the company is doing financially. Your income statement needs to cover company revenue, various expenses and overall net income for a stated period of time.
Here is an example of an income statement for multiple quarters in a company’s financial year:
Your income statement may include the following items:
Revenue: This is the total amount of profits your core business generated over the period summarized on the income statement. “Core business” means the normal activities of a company, not income from other sources like investments held by the company or the sale of business property. The revenue section of your income statement may include line items for resale goods, merchandise sales, services, or whatever else your business regularly draws income from.
Cost of Goods Sold: These are your direct business costs—only the expenses that go directly towards the production of your company’s product or service: raw materials, purchase prices of goods resold, freight, storage and direct labor costs.
When you subtract the cost of goods sold from your revenue, the result is your company’s gross income. Gross income is usually a subtotal on an income statement.
Operating Expenses: Operating expenses are the other regular costs of operating your business itself: things like rent, salaries and wages, insurance, marketing, office equipment and utilities. When this is subtracted from gross income, you have a figure called operating profit, or earnings before interest and taxes (EBIT).
Other Expenses or Income: Taxes paid, debt amortization and interest accrued are usually separate items subtracted from the EBIT total. Additional gains and losses outside the normal core of the business—such as income from selling property or the cost of paying a consumer settlement are also usually counted in other expenses or or income, though not before any qualifying tax is deducted.
Non-Cash Items: Optionally included on some income statements, intangibles like equipment deprecation, resource depletion and stock-based compensation are given estimated financial values and counted against the bottom line of the income statement.
Net Income: The final line of your income statement is your company’s net income—the profit or loss left over when all other expenses are deducted.
Some income statements compare a given interval to those which preceded it (such as multiple financial quarters on the same statement) and measure the comparative gain or loss between those time periods for each item.
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How often should I prepare an income statement?
While income statements can cover whatever interval of time a business finds useful—from a week to a period of multiple years—businesses typically prepare monthly, quarterly, or annual income statements.
You might find when first starting your business that tracking monthly statements helps indicate how your decisions affect company operations. Later on, you might move to quarterly or annual income statements once you have a better idea of your company’s trends, patterns and busy seasons—settling into whatever interval is most suited to your business.
That said, some businesses must keep quarterly income statements to file (along with other financial reports) with the U.S. Securities and Exchange Commission. This requirement only applies to publicly traded businesses and companies with more than 500 shareholders and over $10 million in assets, but it’s something to remember if your business really takes off.
Using an Income Statement
Income statements are particularly useful as a way to track changes in your business over time. By comparing statements from different intervals, you can see how your company revenue, costs, spending and overall net profit or loss changes from one time period to another. You can also compare your income statements with those of similar businesses to determine how well your company is doing relative to them.
Publicly traded companies use income statements as part of their primary financial reports, along with cash flow statements and balance sheets. The reports are used in business plans and reports for investors and creditors, and regulatory filings with government agencies.
How do income statements, cash flow statements and balance sheets differ?
Income statements, cash flow statements and balance sheets are the three main reports used to present a company’s financial information, but each measures different aspects of those finances.
Balance sheets measure assets as equity (the amount shareholders would receive if all debts were paid and company assets liquidated) against liabilities. While income statements measure profit or loss over time, balance sheets are a snapshot of finances on a specific date—usually the last day of a fiscal quarter or year.
Cash flow statements, meanwhile, show how cash and its equivalents enter (cash in) and leave (cash out) a company from its operations, financing and investments over a quarter, year, or other period of time. This is expressed as an overall negative or positive cash flow and helps assess the company’s liquidity, which is how easily a business can access its money when it needs it. If a company’s assets are largely tied up in investments or inventory, it is less liquid than one that has more of its assets in cash form.
What is the difference between an income statement and a profit and loss statement?
There is none. Income statements and profit and loss statements are the same thing. You may have seen terms like profit and loss statement, profit and loss account, revenue statement, earnings statement, expense statement, statement of financial performance, or operating statement. There’s no difference between any of these terms—they all refer to the same sort of report of profits and losses over a period of time.