What is an income statement? Business owner working on creasing an income statement.

An income statement is one of the key financial statements that can help your business and budget and determine financial performance. It’s a helpful tool to monitor your spending and figure out how to allocate money. If you’ve never made an income statement before, don’t sweat it. We’re here to walk you through everything you need to know to get you started on the right track. 

What Is an Income Statement?

An income statement, also known as a profit and loss statement (P&L), summarizes small business expenses and income in a specified accounting period. You'll also track small business expenses, losses, profits, and revenue.

What Is a Single-Step Income Statement?

A single-step income statement is an income statement that has only 2 sections: expenses and revenues. Expenses include: 

  • Administrative expenses
  • Interest expenses 
  • Selling 
  • Revenues include: 

  • Consulting fees
  • Investment income
  • Service revenue
  • What's Included in an Income Statement?

    An income statement includes the following components: 

  • Revenue 
  • Cost of Goods Sold (COGS)
  • Gross profits
  • General and Admin
  • Operating Income
  • Revenue

    Revenue is the first part of an income statement. It is the amount of money that your business makes during a reporting period.

    There are 2 revenues that you'll track: operating and non-operating revenue

    Operating revenue, also known as net sales, is revenue that comes from the primary business that your business does. Non-operating revenue, in contrast, is revenue that your company makes secondarily. 

    Non-operating revenue includes:

  • Asset write-downs
  • Dividend income 
  • Foreign exchange gains or losses
  • Interest income
  • Profits or losses from investments
  • Rental income from property
  • Cost of Goods Sold

    Cost of goods sold (COGS) is the second part of an income statement. It is the amount of expenses required to make and sell a product. You'll record COGS as an expense on your income statement. 

    COGS is handy because it will determine how much product will turn into profit. If COGS increases, you can expect your net income to decrease. 

    There are 3 ways to sort your inventory to expedite the COGS process: 

  • Average Cost Method (average product cost over time, regardless of the date of purchase)
  • FIFO (First In, First Out; the earliest arriving products will sell first, at the lowest price)
  • LIFO (Last In, First Out; the latest arriving products will sell first, at the highest price)
  • You can use COGS to determine the gross profit of your business.

    Gross Profit

    Gross profit is the third part of an income statement. It is a calculation that will allow you to determine your company's profits without other business expenses. 

    Gross profit is equal to the total revenue minus the cost of goods sold (COGS). Gross profit doesn't include: 

  • Amortization 
  • Debts
  • Depreciation
  • Interest
  • Taxes
  • General and Admin

    General and administrative (G&A) expenses are expenses that involve a business operation. These expenses aren't exclusive to a singular part of a business. Instead, they will cover everything that allows your small business to function. 

    Common G&A expenses that you'll add to your income statement include: 

  • Consultant fees
  • Depreciation on office equipment, including furniture
  • Insurance 
  • Rent 
  • Supplies 
  • Subscription
  • Utilities
  • On an income statement, you'll add general and administrative (G&A) expenses below the cost of goods sold (COGS). 

    Operating Income

    Operating income, also sometimes referred to as operating profit, will help you determine how much business revenue is business profit. You’ll determine this amount by subtracting gross profit from your operating expenses. An operating expense can include: 

  • Cost of goods sold (COGS)
  • Depreciation
  • Wages
  • On an income statement, you'll add this below the G&A expenses.

    Income Before Taxes

    Income before taxes represents the operating income adjusted for non-operating income and expenses. This figure serves as the starting point for calculating income tax expenses. It demonstrates a company's profitability before accounting for its tax obligations.

    Income Tax Expense

    Income tax expense is the taxes the company owes on its taxable income. This expense considers applicable tax rates and any tax credits or deductions. Deducting income tax expense from income before taxes calculates the net income of the company.

    Marketing Expenses

    Marketing expenses are expenses that you'll use to promote your business, including advertising, marketing research, promotion, and public relations. You'll deduct marketing expenses from business profit. 

    Marketing expenses should cause an increase in your revenue if done correctly. You may have to tailor these expenses to your industry to get the best results.

    Example of an Income Statement

    A completed income statement will contain your activities on the left and the amounts on the right side of the document. Income statements may show:

  • Cost of goods sold (COGS) 
  • Earnings before tax 
  • Expenses 
  • Gross profit 
  • Net earnings 
  • Revenue or sales
  • Taxes 
  • How Is an Income Statement Different from a Balance Sheet?

    Balance sheets and income statements are different in meaningful ways. Balance sheets show a company's: 

  • Assets
  • Liabilities
  • Shareholder equity
  • Income statements show a company's: 

  • Net sales (revenue) 
  • Cost of Goods Sold
  • Selling, general, and administrative costs
  • Operating income
  • Net interest income 
  • Net income
  • Balance sheets will show you what you own (as assets), owe (as liabilities), and equity. This is helpful for current and future spending because balance sheets will track money earned and money spent.

    Income statements don't show the assets, liabilities, or shareholder equity. Instead, income statements focus on a company's expenses and revenue to determine a company's profitability. Having a clear vision of your company's profitability may help determine the long-term viability of your company. 

    How is an Income Statement Different from a Cash Flow Statement?

    Another key financial statement is the cash flow statement. While the income statement provides insights into profitability, understanding a company's cash flow is equally crucial. The cash flow statement helps monitor the inflow and outflow of cash, ensuring financial health.

    The income statement covers a specific period, usually monthly, quarterly, or annually. It follows the accrual basis of financial accounting, where revenues and expenses are recognized when earned or incurred, regardless of the actual cash transactions. In contrast, the cash flow statement also covers a specific accounting period, aligning with the income statement's timeframe. However, it focuses on actual cash transactions during that period. It ensures that cash movements are accurately captured.

    Work with the Pros

    Creating and understanding an income statement can seem difficult, but the benefits of doing so are undeniable. It allows you to keep track of your income and expenses, informing make strategic decisions for your business. However, complexities can arise when dealing with various aspects such as COGS, gross profit, operating income, and others. That's where partnering with a professional accounting firm such as 1-800Accountant becomes vital.

    We can simplify the difficulties associated with the income statement for you. Our team of dedicated bookkeeping professionals is adept at handling every facet of your financial management, from creating income statements to offering tailored financial advice. We'll take care of the complexities, allowing you to focus on what you do best - growing your business.

    This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.