An income statement can help your business and budget. 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 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 on 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 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 will help you determine how much business revenue is business profit. You’ll determine this amount by subtracting gross profit from your operating expenses. Operating expenses include: 

  • Cost of goods sold (COGS)
  • Depreciation
  • Wages

On an income statement, you’ll add this below the G&A expenses.

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 a 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 than 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. 

Work with the Pros

Using an income statement is one of the most important ways to track your finances. Work with the pros to make sure you meet your bookkeeping needs.

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Written by Joshua Meller

Josh Meller is Sr. Manager of Accounting Services in the Pacific zone at 1-800Accountant. Before shifting into tax & accounting, he work...