What Is an Income Statement for a Business?
4 of 10 in Series: The Essentials of Business Financial Statements
Did your business make any money? You can find the answer in your income statement, the financial report that summarizes all the sales activities, costs of producing or buying the products or services sold, and expenses incurred in order to run the business.
Income statements summarize the financial activities of a business during a particular accounting period (which can be a month, quarter, year, or some other period of time that makes sense for a business’s needs).
Normal practice is to include three accounting periods on an income statement: the current period plus two prior periods. So a monthly statement shows the current month plus the two previous months; a quarterly statement shows the current quarter plus the two previous quarters; and an annual statement shows the current year plus the two previous years. Providing this much information gives income statement readers a view of the business’s earning trends.
The five key lines that make up an income statement are:
Sales or Revenue: The total amount of money taken in from selling the business’s products or services. You calculate this amount by totaling all the sales or revenue accounts. The top line of the income statement will be either sales or revenues; either is okay.
Cost of Goods Sold: How much was spent in order to buy or make the goods or services that were sold during the accounting period in review.
Gross Profit: How much a business made before taking into account operations expenses; calculated by subtracting the Cost of Goods Sold from the Sales or Revenue.
Operating Expenses: How much was spent on operating the business; qualifying expenses include administrative fees, salaries, advertising, utilities, and other operations expenses. You add all your expenses accounts on your income statement to get this total.
Net Income or Loss: Whether or not the business made a profit or loss during the accounting period in review; calculated by subtracting total expenses from Gross Profit.