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What Is An Income Statement? Definition, Purpose, & Example

Here is an example of how to prepare an income statement from Paul’s adjusted trial balance in our earlier accounting cycle examples. Internal users like company management and the board of directors use this statement to analyze the business as a whole and make decisions on how it is run. For example, they use performance numbers to gauge whether they should open new branch, close a department, or increase production of a product.

  • Payment is usually accounted for in the period when sales are made or services are delivered.
  • Horizontal analysis makes financial data and reporting consistent per generally accepted accounting principles (GAAP).
  • Financial projections help you make more informed decisions about your business.
  • Non-operating revenue comes from ancillary sources such as interest income from capital held in a bank or income from rental of business property.

For a deeper dive into how to prepare financial statements, like an income statement and a balance sheet, check out our video on bookkeeping! The five bookkeeping steps we go over will help you get the most out of your income statement, and beyond. Income statement evaluates the profit or loss of a business over a period of time, whereas balance sheets show the financial position of a business at a specific point in time. An income statement helps business owners decide whether they can generate profit by increasing revenues, by decreasing costs, or both. It also shows the effectiveness of the strategies that the business set at the beginning of a financial period.

Types of Income Statements

Another use is to track income statement line items over time, to see if there are any spikes or dips in the data that indicate the presence of problems that management should address. A single-step income statement, on the other hand, is a little more straightforward. It adds up your total revenue then subtracts your total expenses to get your net income. We will further explore how to assess each of these expenses later in the chapter using common-size analysis.

If you prepare the income statement for a particular business line or segment, you should limit revenue to products or services that fall under that umbrella. Your reporting period is the specific timeframe the income statement covers. Depreciation expenses are reported like any other normal business expense on your income statement, but where you include it depends on the nature of the asset being depreciated. These are all expenses incurred for earning the average operating revenue linked to the primary activity of the business. They include the cost of goods sold (COGS); selling, general, and administrative (SG&A) expenses; depreciation or amortization; and research and development (R&D) expenses. Typical items that make up the list are employee wages, sales commissions, and expenses for utilities such as electricity and transportation.

Components of an Income Statement

An income statement helps you analyze trends within your business, allowing you to forecast and plan for the future. Using an income statement, you can track the cost of sales during a certain period of time to determine if your expenses and prices are too high or too low. And remember, you can easily generate income statements using accounting software, like Wave’s. You can connect our accounting software to your business bank account, import your transactions, and automatically generate important reports, including income statements, saving you major time and headaches.

Great! Your retirement-ready report is on its way.

It is called the single-step income statement as it is based on a simple calculation that sums up revenue and gains and subtracts expenses and losses. Generally, all income statements include revenue, gains, expenses, losses, from primary and secondary business activities. If the bottom line is negative, that would indicate your business has a net loss.

Select the reporting period for the income statement

Businesses use income statements to examine financial results and identify operational issues that may affect net income. On the other hand, balance sheets primarily indicate whether or not the business has enough funds to meet upcoming obligations. The exact line items on your income statement would reflect your specific business. You could also change the date range to evaluate a specific month, quarter, year or another period of time. The bottom line is when you are familiar with the income statement and use it as a business tool, understanding the information the report is relaying to you will allow you to make informed and profitable business decisions. No business owner should be making decisions without understanding how those decisions will affect the bottom line of the business, which is the profit.

When comparing companies, EPS and the P/E ratio can help differentiate two companies in the same category and help an investor make a more sound investing decision but both use the information given through the income statement. Ultimately, income statements keep track of everything going in and out and can act as a guide for business decisions—big or small. The income statement may also be referred to as the profit and loss statement, statement of earnings, or statement of operations. Analyzing the income statement can provide insights into the profitability of a company, as well as the potential for future growth.

EBT, also referred to as pre-tax income, measures a company’s profitability before income taxes are accounted for. An income statement shows how effective the strategies set by the management at the beginning of an accounting period are. The income statement is also known as a profit and loss statement, statement of operation, statement of financial result or income, or earnings statement.

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