Bookkeeping 101: What Is an Income Statement?

An income statement, also called a profit and loss (P&L) statement (used interchangeably), is one of the key financial statements that helps your business measure financial performance. It’s a helpful tool for monitoring your spending and determining how to allocate money. If you’ve never made an income statement before, this guide will help.

Small business owners, freelancers, and bookkeepers building their own financial statements should use this article to understand the components of an income statement, single-step versus multi-step formats, and how it compares to your balance sheet and cash flow statement.

What Is an Income Statement?

A P&L/income statement summarizes small business expenses and income in a specified accounting period (typically monthly, quarterly, or annually). You'll also track business expenses, losses, profits, and revenue.

What's Included in an Income Statement?

An income statement includes the following components:

• Revenue

• COGS

• Gross profits

• General and Admin

• Operating Income

Revenue

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

There are two types of revenue 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 you do. Non-operating revenue, by contrast, is revenue your company earns secondarily.

Non-operating revenue can include:

• Asset write-downs

• Dividend income

• Foreign exchange gains or losses

• Interest income

• Profits or losses from investments

• Rental income from property

COGS

COGS is the second part of an income statement. It is the expense required to make and sell a product. You'll record COGS as an expense on your income statement.

COGS is useful because it shows how much product cost turns into profit. If COGS increases, you can expect your net income to decrease.

There are three 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 calculates your company's profit before other business expenses.

Gross profit equals total revenue minus 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 any one part of the 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

• Marketing expenses (advertising, promotion, public relations)

• Supplies

• Subscription

• Utilities

On an income statement, you'll add G&A expenses below the COGS.

Operating Income

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

• 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 is the starting point for calculating income tax expense. 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.

Single-Step vs. Multi-Step Income Statements

Single-Step Income Statement

A single-step income statement has only two sections: expenses and revenues. Expenses include:

• Administrative expenses

• Interest expenses

• Selling

Revenues include:

• Consulting fees

• Investment income

• Service revenue

Multi-Step Income Statement

A multi-step income statement separates operating revenue and expenses from non-operating items and shows gross profit and operating income as distinct subtotals before arriving at net income. This is the format most lenders, investors, and growing businesses expect to see.

A Worked Income Statement Example

This is a worked annual income statement for a hypothetical small consulting business, Japex Advisory Partners, for the year ending December 31, 2026. In service businesses, COGS is often labeled as Cost of Services or direct project costs.

How Often Should You Prepare an Income Statement?

Most small businesses prepare income statements monthly or quarterly to support internal decision-making, and annually for tax filing. Income statements are also critical when seeking credit or funding. Lenders and investors expect to see recent statements before moving forward.

Most accounting software platforms can automate this cadence for your business.

How Is an Income Statement Different from a Balance Sheet?

Balance sheets and income statements are different in meaningful ways.

Balance sheets will show you what you own (as assets), owe (as liabilities), and equity. This helps with current and future spending because balance sheets 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 profitability. A clear view of your company's profitability will help determine its long-term viability.

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

Another key financial statement is the cash flow statement. While the income statement shows profitability, understanding your company's cash flow is equally crucial. The cash flow statement helps track cash inflows and outflows, supporting 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.

Using Your Income Statement to Track Business Health

Your income statement has several uses beyond summarizing your expenses and income for a specific period. You can also use it to help calculate your gross profit margin and net profit margin, spot expense creep period over period, and compare business performance against prior months or quarters.

There are several ways to put the report to work in practice.

Turning Your Income Statement into a Growth Tool

Your income statement is key to measuring financial performance and monitoring your business spending. While software has made generating an income statement more manageable, you still need to know how to read it and act on what it reports. This is where dedicated year-round support can make a significant difference.

Ensure your income statement's data is always accurate and up to date with 1-800Accountant's full-service bookkeeping solution. Focus on your business while your bookkeeper handles your records year-round.

FAQs About Income Statements

What's the difference between an income statement and a profit and loss statement?

There is no actual accounting difference between an income statement and a P&L statement. They are simply two different names for the same financial report. "Income statement" is usually more formal, while "P&L" is more commonly used in daily business operations.

Does my small business need a multi-step or single-step income statement?

A single-step statement uses one simple equation to subtract all expenses from all revenues to find net income. This basic format works well for smaller or simpler sole proprietorships. However, if you want detailed operational insights or need to impress external lenders, a multi-step statement breaks down gross and operating profits.

How do I calculate net income on an income statement?

To calculate this statement, you first subtract your COGS from total revenue to determine your gross profit. Next, you subtract your operating expenses from that gross profit to find your operating income. Finally, you subtract interest expense and taxes from your operating income to arrive at net income.

What is EBITDA, and how does it relate to the income statement?

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It relates closely to the income statement because it takes operating income and adds back non-cash expenses like depreciation and amortization. Lenders use this metric to evaluate a company's core operating profitability without financing or accounting variables.

Can accounting software generate my income statement automatically?

Modern accounting platforms can generate your income statement quickly. As long as you categorize your daily sales, invoices, and vendor expenses correctly, the software applies the necessary formulas automatically. This automation saves hours of manual data entry and reduces human calculation errors.

How often do lenders and investors want to see an income statement?

Lenders and investors typically request updated income statements quarterly or annually. If you are actively seeking a business loan or outside funding, they will want to review trailing statements for the past one to three years. Internal stakeholders, meanwhile, often review these reports monthly to track budgets and cash flow.