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An income statement tracks the revenue and expenses of a company over a set period, showing whether they’re making or losing money. An income statement is also known as a profit and loss statement or P&L.
Companies need to track revenue and expenses for tax purposes, to get approved for business loans and understand their financial health. Without records and financial documents, small business owners will have difficulty running a successful business.
What is an income statement?
An income statement shows key performance indicators, such as revenue and sales before taxes and business expenses over an established period. You can track monthly, quarterly or annual costs versus revenue to determine overall profits.
An income statement can also be used internally to analyze trends. For instance, you may discover that the last quarter of the year is always busier than your first quarter. Comparing income statements over time allows stakeholders to forecast when they will have their most profitable months.
You can also use an income statement to forecast future expenses by determining when costs are highest and lowest.
Do businesses need income statements?
An income statement is the best way for a business to track expenses over time and determine if its products or services are priced correctly for profit. What you learn from an income statement can show whether it’s time to cut costs, raise your prices or both.
Profit and loss data also ensures a business can compare net and gross revenue over a set period. If you only look at gross revenue without subtracting losses, you won’t have an accurate picture of what your business is actually bringing in.
Income statements enable businesses to see their cash flow throughout the year and identify seasonal trends. Also, if you need a small business loan or lines of credit at any point, your income statement will be a critical loan document for proof of revenue.
What’s the difference between an income statement and a balance sheet?
While an income statement compares total revenue versus total expenses, a balance sheet is a snapshot of your liabilities, assets and equity. A balance sheet doesn’t track trends; it reveals if your assets and ownership are equal to or less than your current debts.
|Income statement||Balance sheet|
|Period||A range, such as Jan. 1 to March 31.||A single point in time, such as Jan. 1, 2023.|
|What’s reported||Revenue and expenses.||Asset, equity and liabilities.|
|Primary use||To track revenue and expense trends and determine if you had a net profit or loss during a certain period.||To determine if you currently have more assets than debts without taking into account performance trends.|
What is included in an income statement?
All income statements should include similar items, whether for a small business or a large corporation. Each line item tracks data only during the predetermined reporting period. Here’s what is included in an income statement:
- Revenue: The total money from sold products and/or services.
- Expenses: The total money spent, including inventory, taxes and labor. Depending on how in-depth you want to be, expenses can be put into buckets or specifically detailed.
- COGS: This stands for cost of goods sold. The COGS figure determines the labor, materials and other expenses associated with selling whatever generated the revenue.
- Gross profits: Subtracting the COGS from the total revenue reveals the gross profit.
- Operating expenses: These indirect costs often have their own line item on an income statement, including rent and legal fees.
- Income: Subtracting operating expenses from your gross profit will give you a starting income figure.
- Interest and tax charges: List any interest you pay on business loans and tax payments as expenses.
- Net income: To determine your net income, subtract taxes and interest from your income figure.
Types of income statements
Depending on the size and nature of your business, you may need a single-step income statement or a multi-step income statement. If you’re looking for a template, SCORE has a profit and loss projection. The Small Business Administration (SBA) also has an Excel income statement template.
Single-step income statement
Small businesses just starting out may find single-step income statements sufficient. This statement requires only a simple calculation to determine your profits and losses. It may also be appropriate for larger businesses with a single line of business and minimal overhead.
The equation for this type of income statement is:
Net income = (Revenues + Gains ) – (Expenses + Losses)
Multi-step income statement
A multi-step income statement is more complex. It separates expenses into operating and non-operating costs, shows types of revenue and often includes subtotals within revenue and cost categories. This type of income statement is appropriate for large companies or businesses with multiple revenue streams that could be independently thriving or failing.
Common equations used in a multi-step income statement are:
Gross profit = Net sales – Cost of goods sold
Operating income = Gross profit – Operating expenses
Net income = Operating income + Non-operating income
The bottom line
An income statement is useful for internal trend tracking and external proof of revenue. If you apply for a business loan, you’ll be grateful for reports showing your history of growth. The more detailed your income statement, the more you can learn about where you’re overspending and where your best revenue streams are.
Frequently asked questions about income statements
Income statements report revenue and expenses, which ultimately reveal gains and losses. These four components tell a picture of financial health.
A typical income statement includes revenue, operating costs, non-operating costs, cost of goods sold, taxes and interest charges and gross profits.
A balance sheet outlines a business’s current assets, liabilities and equity at a single moment in time. On the other hand, an income statement tracks a business’s revenue and expenses over a set period to show either a net profit or a net loss.