The income statement plays a key role in helping companies understand their performance. The income statement provides company management with an overview of the company’s revenues and expenses during a given accounting period.
In conjunction with balance sheets and cash flow statements, businesses can understand their financial performance.
An accurate income statement is very important to measure the company’s financial performance. They provide detailed insight into the profitability of the business.
As a small business owner, creating an income statement can help you understand the company’s business activities and be proactive with your finances.
The right accounting software can help you keep detailed records and create an accurate income statement for your business.
What is an Income Statement?
The income statement gives investors and business leaders an overview of a company’s expenses, sales, and net income during the accounting period.
In most cases, the income statement is for three months, the year, or 12 months.
An income statement, referred to as a profit and lost statement or income statement, provides stakeholders with important information about the ability of a business to generate profits.
An income statement statement also allows businesses to see areas where they can reduce costs and increase their revenue.
The income statement shows several things, including:
- Operating profit
- Non-operating income
- Profit (other income)
- Main activity costs (COGS, depreciation , amortization , etc.)
- Secondary activity costs (for example, interest costs)
- Losses from non-operational activities
Overall, the income statement provides a valuable overview of a business’s finances. This information gives investors and business leaders a better understanding of the company’s performance.
While an income statement provides an overview of the financial health of your business, it’s important to understand what the data is telling you. To optimize your company’s finances and take action to increase your profits,
You can analyze your income statement in one of two ways: horizontal analysis and vertical analysis.
1. Horizontal analysis looks at trends and changes over several periods. This method provides insight into growth patterns and allows individuals to compare changes in financial statements over time.
To perform a horizontal analysis on the income statement, you must calculate the percentage change for each line item from year to year.
2. On the other hand, there is vertical analysis which focuses on the relative size of line items so you can compare them more easily.
To perform a vertical analysis, calculate each line item as a percentage of revenue. This will produce a “common measure” result for the same time period. Then, you must divide each line item by its revenue.
How to Make an Income Statement?
As you can see, creating an income statement is a powerful way to see the financial well-being of your business.
Accounting software empowers business owners to automatically generate financial reports, such as income statements. Continue reading to learn how you can create an income statement.
1. Select Reporting Period
Establishing a reporting period, often referred to as an accounting period, is an important part of preparing an income statement. This is the period of time the financial performance of a business is reported and analyzed.
There is no standard one day set for the reporting period – instead, businesses can choose their reporting period to be one month, quarterly, semi-annually, or annually.
By choosing shorter reporting periods, business leaders can analyze their companies’ financial performance on a more regular basis.
2. Create a Trial Balance Report
A trial balance is used to confirm that debits equal credits when accounting. A trial balance statement is one of the first steps a business must take at the end of an accounting period. The trial balance report helps detect errors before proceeding with the accounting process.
When you’re done, the trial balance report will give you all the balanced numbers you need to create an income statement. The software simplifies the trial balance report generation process, allowing you to move to the next step quickly.
3. Calculate Income
Next, you need to calculate your business revenue. Total revenue is the amount of money earned before deducting expenses. This can include sales and interest and dividends from investments.
4, Add Cost of Goods Sold (HPP)
After you calculate the revenue, you need to add up the cost of goods sold (COGS). COGS refers to the cost of producing goods sold by your business.
COGS should include direct labor costs , overhead costs , and materials directly used to make products.
It is important to note that cost of goods sold can include costs outside that affect production, such as costs of marketing or distributing a product.
In short, HPP helps businesses forecast company profits. Using our accounting software, you can add up the total COGS when creating an income statement.
Many income statements include cost of revenue, which represents the direct costs associated with the services and/or goods the company provides.
For those in the service industry, cost of revenue is more popular because it provides a complete record of the costs associated with selling goods or services.
In contrast to HPP, the cost of revenue does not include external production costs, such as marketing and distribution. In contrast, the cost of revenue considers the COGS or service costs in addition to the costs required to generate sales.
Revenue costs include:
- Labor costs
- Sales discount
Calculate Gross Margin
Next, you need to calculate the gross margin. Gross margin is gross profit (total sales minus COGS) divided by total sales.
Gross margin measures the percentage of a product’s cost versus its selling price. Gross margin also plays an important role in showing lenders that your business can pay back.
Add Operational Cost
In this step in creating an income statement, you must put sales revenue at the top of the income statement and then subtract COGS and operating costs . This will give you total operating income. You need to add up your operating costs, which are the total costs of running a normal business operation.
Total operating costs often include:
- Research and development
- Selling, general and administrative expenses
Viewing accurate operating expense reports can show you how you can reduce your operating costs without impacting your business performance.
On the other hand, non-operating costs can be costs a business accrues that are not related to its core operations.
In many cases, non-operating expenses can be in the form of borrowing costs or interest expenses. Sometimes, a certified public accountant (CPA) will write off non-operating expenses to see how the business performs without these fees.
Calculate Income With Income Tax
Next, you need to calculate your income with income tax. While you don’t need to provide a percentage tax rate on the income statement, you will need this figure to show the tax expense.
You can calculate your tax burden by multiplying your tax rate (individual or business) by your income (before tax). It is important to note that pretax income must account for the cost of non-deductible items.
Determine Net Profit
Before you finalize the income statement, you need to determine net income. Net profit gives you a better understanding of the profitability of your business, as it gives you the total profit.
To find your net income, you need to subtract business expenses and operating expenses from business income. Then, subtract taxes from this amount. From there, you will have a net income, which needs to be added to the bottom line.
Complete Your Income Statement
Finally, you must complete your income statement. Completing your income statement with AccurtateOnline accounting software is easy. Just make sure you write a header to indicate that this is an income statement for a specific accounting period and add important business details.
From there, you can save the income statement to your AccurateOnline account, print it, or send it to anyone who needs it.
What is an Example of an Income Statement?
The income statement is important for accounting purposes, regardless of the size of your business. In the next section, we provide an example of a one-step income statement.
One-Step Income Statement Example
Smaller companies typically use a one-step income statement rather than a multi-step income statement.
An easier approach is needed to add up the company’s total revenue. This reduces the company’s total costs, resulting in a net profit.
Smaller types of businesses that often generate one-step income statements include partnerships, service companies, and sole proprietorships.
In some cases, large companies may produce a one-step income statement for financial reporting purposes in addition to a multi-step income statement.
Before creating your own, take a look at our sample income statement:
|Income Stream 1||$ 700,000|
|Income Stream 2||$ 700,000|
|Income Stream 3||$ 700,000|
|4 . Income Stream||$ 700,000|
|Total Net Income||$ 2,800,000|
|Cost of goods sold (HPP)||$ 500,000|
|GROSS PROFIT||$ 2,300,000|
|Marketing campaign||$ 200,000|
|Client Expenditure||$ 20,000|
|Depreciation & Amortization||$ 300,000|
|Total cost||$ 1,085,000|
|Profit Before Interest & Tax||$ 415,000|
|Interest expense||$ 25,000|
|income tax||$ 20,000|
|NET PROFIT||$ 240,000|
What is the Difference Between an Income Statement and a Balance Sheet?
Both the income statement and balance sheet provide important financial information for a business. However, the balance sheet provides a single picture of what a company has.
While a balance sheet shows a moment in time, an income statement provides information about a specific time period.
That’s all the information about how to compile and make an income statement and hopefully it’s useful.