Income statement – Definition, Importance and Example | Zoho Books (2024)

What is income statement?

An income statement is a financial statement that shows you the company’s income and expenditures. It also shows whether a company is making profit or loss for a givenperiod.The income statement, along withbalance sheetandcash flow statement, helps you understand the financial health of your business.

The income statement is also known as a profit and loss statement, statement of operation, statement of financial result or income,orearnings statement.

Importance of an income statement

An income statement helpsbusiness owners decide whether they can generate profit by increasing revenues,by decreasing costs, or both.It alsoshows the effectiveness of the strategies thatthe business set at the beginning of a financial period. The business ownerscanrefer to this document tosee if the strategies have paid off. Based on their analysis, theycancome up withthe best solutions to yield more profit.

Following are the few other things that an income statementinforms.

  1. Frequent reports:While other financial statements are published annually, the income statement is generated either quarterly or monthly.Due to this, business owners and investorscan track the performance of the business closely and make informed decisions. This also enables them to find and fix small business problems before they become large and expensive.

  2. Pinpointing expenses:This statement highlights the future expenses or any unexpected expenditures which are incurred by the company, and any areas which are over or under budget. Expenses include building rent, salaries and other overhead costs. As a small business begins to grow, it may find its expenses soaring. These expenditures may involve hiring workers, buying supplies and promoting the business.

  1. Overall analysis of the company:This statement givesinvestorsan overviewof thebusiness in which they are planning to invest.Banks and other financial institutionscan alsoanalyze this document to decide whether the business is loan-worthy.

Who uses an income statement?

There aretwomain groups of people who use this financial statement: internal and external users. Internal users include company managementand the board of directors, who usethis information to analyze the business’s standing and make decisions in order toturn a profit. They can also act onany concerns regardingcash flow.External users compriseinvestors, creditors, andcompetitors. Investors checkwhether the companyis positioned to grow and be profitable in the future,sotheycan decide whether to invest in the business. Creditors usethe income statement to checkwhether the company has enough cash flow to pay offits loans or take out a new loan. Competitors use them to get details about the success parameters of a business and get to know about areas where the business is spending an extra bit, for example, R&D spends.

Income statement format with the major components

The following information is covered in an income statement. The format for this document may vary depending on the regulatory requirements, the diverse business needs and the associated operating activities.

Revenue orsales:This is the first section on the income statement, and it gives youa summary of gross sales made by the company. Revenue can be classified into two types: operatingand non-operating. Operating revenue refers to the revenue gained by a company by performing primary activities like manufacturing a product or providing a service.Non-operating revenue is gainedby performingnon-core business activities such as installation, operation, or maintenance of a system.

Cost of goods sold (COGS):This is the total cost of sales or services, also referred to as the cost incurred to manufacture goods or services.Keep in mindthat it only includes the costof products which you sell. COGS does not usually include indirect costs, like overhead.

Gross profit:Gross profit is defined as net sales minus the total cost of goods sold in your business. Net sales is the amount of money you brought in for the goods sold, while COGS is the money you spent to produce those goods.

Gains:Gain is a result of a positive event that causes an organization’s income to increase.Gains indicate the amount of money realized by the company from various business activities like the sale of an operating segment. Likewise, the profits from one time non-business activities are also included as gains for the business. For example, company selling off old vehicles or unused lands etc. Although gain is considered secondary type of revenue, the two terms are different. Revenue is the money received by a company regularly while gain can be accounted for the sale of fixed assets, which is counted as a rare activity for a company.

Expenses:Expenses are the costs that the company has to pay in order to generate revenue.Some examples of common expenses are equipment depreciation, employee wages,andsupplier payments.There are two main categories for business expenses:operatingand non-operatingexpenses.Expenses generated by company’s core business activities are operating expenses, while the ones which are not generated by core business activities are known as non-operating expenses. Sales commission, pension contributions, payroll account for operating expenses while examples of non operating expenses include obsolete inventory charges or settlement of lawsuit.

See Also
Net Loss

Advertising expenses:These expensesare simplythe marketing costs required to expand the client base.They include advertisementsin print and online media as well asradioand video ads. Advertising costs are generallyconsidered part of Sales, General & Administrative (SG&A) expenses.

Administrative expenses:It can be defined as the expenditure incurred by a business or company as a whole rather than being the ones associated with specific departments of the same company. Some of the examples of administrative expenses are salaries, rent, office supplies, and travel expenses. Administrative expenses are fixed in nature and tend to exist irrespective of the level of sales.

Depreciation:Depreciation refers to the practice of distributing the cost ofalong-term asset overits life span.It is a management accord to write off a company’s asset value but it is considered a non-cash transaction. Depreciation mainly shows the asset value used up by the business over a period of time.

Earnings before tax (EBT):This is a measure of a company’s financial performance. EBT is calculated by subtracting expenses from income,before taxes. It is one of the line items on a multi-step income statement.

Net income:Net profit can be defined as the amount of money you earn after deducting allowable business expenses. It is calculated by subtracting total expenses from total revenue. While net income is a company’s earnings, gross profit can be defined as the money earned by a company after deducting the cost of goods sold.

How to read an income statement

To understand an income statement, let’s use an example. Here’s the income statement for the first quarter of this year for a newlocalfootball association.

SINGLE-STEP INCOME STATEMENT EXAMPLE

Income statement – Definition, Importance and Example | Zoho Books (1)

From the above example, you cansee that the association earned $30,000 from the sale of goods and another$5,000 by charging for training. The associationspentmoneyon various activities, to arrive attotal expenses of $13,450. They gained $2,000 byselling an old van, while facing a loss of $1,000 for settling a pending consumer lawsuit. Now, to calculate the net income, let us enter the values in the following equation:

Net Income = (Revenue + Gains)– (Expenses + Losses)

= (35,000+2,000)–(13,450+1,000) = $22,550

The above example is one of the simplesttypes of income statements, where you apply the valuesof income, expense, gains and loss into theequation to arrive at the net income. Since it is based on a simple calculation, it is called asingle-step income statement.

MULTI-STEP INCOME STATEMENT EXAMPLE

In the real world,companiesthatoperate at a global level provide a wide range of products and services and involve themselves inmergers and partnerships. Due to these activities, they have a complex list of activities and expenses to note. These companies also have to comply with specific reporting regulations.So bigger companies opt formulti-step income statements. In this system, operating revenues, operating expenses, and gains are separated from non-operating expenses, non-operating revenues, and losses. Profitability is represented at four levels: gross, operating, pre-tax, and post-tax.The followingexampleuses the same company data as the single-step income statement.

Income statement – Definition, Importance and Example | Zoho Books (2)

Conclusion

An income statement is a rich source of informationabout the key factors responsible for a company’s profitability. It gives you timely updatesbecause it is generated much more frequently than any other statement. Theincome statement shows a company’s expense, income, gains, and losses, which can be put into a mathematical equation to arrive at thenet profit or loss for that time period. This information helps you make timely decisions to make sure that your business is on a good financial footing.

Income statement – Definition, Importance and Example | Zoho Books (2024)

FAQs

Income statement – Definition, Importance and Example | Zoho Books? ›

An income statement is a financial statement that shows you the company's income and expenditures. It also shows whether a company is making profit or loss for a given period. The income statement, along with balance sheet and cash flow statement, helps you understand the financial health of your business.

What is income statement with definitions? ›

An income statement shows a company's revenues, expenses and profitability over a period of time. It is also sometimes called a profit-and-loss (P&L) statement or an earnings statement. It shows your: revenue from selling products or services. expenses to generate the revenue and manage your business.

What is the definition of income statement in PDF? ›

The income statement provides a summary of revenue and expenses of a business over a certain period of time. This could be a calendar year, a fiscal year, or whatever time period is relevant for your business.

What is the definition of an income statement quizlet? ›

Income Statement. An income statement reports the revenues earned less the expenses incurred by a business over a period of time.

What is the most important thing on an income statement? ›

The four key elements in an income statement are revenue, expenses, gains, and losses. Together, these provide the company's net income for the accounting period.

What is the main purpose of the income statement? ›

The income statement shows a company's expense, income, gains, and losses, which can be put into a mathematical equation to arrive at the net profit or loss for that time period. This information helps you make timely decisions to make sure that your business is on a good financial footing.

Why is income important? ›

The income you receive every month does so much for you. It pays your bills, funds your trips, and fulfils your every need. But if you do not keep a cautious eye, spending can become unnecessary, and saving can become a rare habit.

What is the summarization of the income statement? ›

Also known as profit and loss (P&L) statements, income statements summarize all income and expenses over a given period, including the cumulative impact of revenue, gain, expense, and loss transactions.

What is the formula for the income statement? ›

You would use three formulas throughout the income statement: Step 1: Gross profit = net sales – cost of goods sold. Step 2: Operating income = gross profit – operating expenses. Step 3: Net income = operating income + non-operating income.

What is the income statement also known as the statement? ›

An income statement is also known as a statement of earnings, a statement of operations, a revenue statement, or a profit and loss statement (P&L), and is used by financial professionals.

What is the main thing you can learn from an income statement? ›

The income statement presents information on the financial results of a company's business activities over a period of time. The income statement communicates how much revenue the company generated during a period and what costs it incurred in connection with generating that revenue.

What three categories can be found on an income statement? ›

The income statement is read from top to bottom, starting with revenues, sometimes called the "top line." Expenses and costs are subtracted, followed by taxes. The end result is the company's net income—or profit—before paying any dividends. This is where the term "bottom line" comes from.

What is the basic format of the income statement? ›

Income Statement Components

All you have to do is use this simple formula: Revenue - Expenses = Net Income. Revenue is the money that a company takes in. Expenses are the money that a company pays out. Net income is the amount of money that is left after a company subtracts their expenses from their revenue.

How to explain an income statement? ›

What is the Income Statement? The Income Statement is one of a company's core financial statements that shows their profit and loss over a period of time. The profit or loss is determined by taking all revenues and subtracting all expenses from both operating and non-operating activities.

What does a good income statement look like? ›

Your income statement follows a linear path, from top line to bottom line. Think of the top line as a “rough draft” of the money you've made—your total revenue, before taking into account any expenses—and your bottom line as a “final draft”—the profit you earned after taking account of all expenses.

What is the basic income statement? ›

The general formula for an income statement is revenue – expenses = net income. In other words, subtract all expenses (costs of goods sold, operating expenses, taxes) from total revenue to find the net profit or net loss for a given period.

What is the definition of income in accounting? ›

Income is an accounting term that is used to describe the excess of revenue over expenses. In other words, income is the difference between what you earn and what you spend. Income can be classified as current or non-current depending on whether it is being generated right now or in the future.

What is the difference between the balance sheet and income statement? ›

Owning vs Performing: A balance sheet reports what a company owns at a specific date. An income statement reports how a company performed during a specific period. What's Reported: A balance sheet reports assets, liabilities and equity. An income statement reports revenue and expenses.

What is the income statement by functions? ›

An income statement by function is the one in which expenses are disclosed according to different functions they are spent on (cost of goods sold, selling, administrative, etc.)

References

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