What Is an Income Statement for a Business?
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.
Accounting Glossary
accounting equation
The equation Assets = Liabilities + Equity, which demonstrates the two-sided nature of accounting and is useful for explaining the concept of double-entry accounting (or double-entry bookkeeping).
Accounting Glossary
accounting period
The time period for which financial information is being tracked in a business, such as monthly, quarterly, or annually.
Accounting Glossary
accounts receivable
An account that records the amounts that customers owe to a business.
Accounting Glossary
adjusting entry
A correction made to a bookkeeping account that adjusts for accounting errors or other necessary changes at the end of the accounting period.
Accounting Glossary
cash flows
Used to describe the source or sources of cash or how cash is used.
Accounting Glossary
Chart of Accounts
A list of all the accounts used by a business, including what types of transactions go into each account.
Accounting Glossary
debit
An accounting entry that increases an asset or expense account, and decreases a liability or income account.
Accounting Glossary
dividends
A portion of a company’s profits paid by share of common stock on a quarterly or annual basis.
Accounting Glossary
FASB
Financial Accounting Standards Board. FASB is the highest-ranking authority in the private (non-government) sector of the U.S. for making pronouncements on GAAP and for keeping accounting standards up-to-date.
Accounting Glossary
Federal Unemployment Tax
In the U.S., the fund that used to be known simply as Unemployment. Employers contribute to the fund, and states also collect taxes to fill their unemployment fund reserves. (The acronym FUTA means Federal Unemployment Tax Act.)
Accounting Glossary
fidelity bonds
A type of insurance — typically carried by employers for their employees — that helps guard against theft and reduce the risk of loss.
Accounting Glossary
FIFO
First-in, first-out. A method for costs of goods sold in which a business charges out product costs to cost of goods sold expense in the chronological order in which the goods were acquired.
Accounting Glossary
fungible
Describes a product that is interchangeable and virtually indistinguishable from another product.
Accounting Glossary
General Ledger
A summary of all of a business’s accounts and transactions.
Accounting Glossary
IASB
International Accounting Standards Board. The IASB (based in London) is the main authoritative accounting standards setter outside the U.S.
Accounting Glossary
Journals
The location in which bookkeepers keep records (in chronological order) of daily company transactions.
Accounting Glossary
LIFO
Last-in, first-out. A method for costs of goods sold that selects the last item you purchased first, and then works backward until you have the total cost for the total number of units sold during the period.
Accounting Glossary
LLP
Limited liability partnership. A legal structure that state laws offer to qualified professionals in which all the partners have limited liability.
Accounting Glossary
PC
Professional corporation. A legal structure that state laws offer to qualified professionals who otherwise would have to operate as an unlimited partnership liability.
Accounting Glossary
petty cash
A cash account that businesses keep on hand for unexpected expenses.
Accounting Glossary
revenue
Monies that are collected in the process of selling a company’s goods and services.
Accounting Glossary
salvage value
The amount that an asset is worth after it has been fully depreciated.
Accounting Glossary
statement of cash flows
A financial statement that summarizes a business’s cash inflows and outflows during an accounting period.
Accounting Glossary
transactions
Economic exchanges between a business or other entity and the parties with which the entity interacts and makes deals.
Accounting Glossary
worker’s compensation insurance
A type of insurance carried by employers that covers its employees in case they are injured on the job.
