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Overview of Income Statement
Definition of
Income Statement
What is an Income Statement? An Income Statement, also commonly known as a Profit and Loss (P&L) Statement, Statement of Operations, or Statement of Earnings, is one of the main financial statements a business prepares. It reports a company's financial performance over a specific accounting period by summarizing its revenues (or income) and expenses. The final result, the bottom line, shows whether the company made a net profit or incurred a net loss during that period. For a deeper dive, see our post on the Anatomy of an Income Statement.
Activities Related to
Income Statement
Here is a list of Income Statement related activities:Â
Recording all revenue transactions, Tracking and categorizing all operating expenses, Calculating Cost of Goods Sold (COGS), Determining Gross Profit, Deducting operating expenses to find operating income, Accounting for interest and taxes to arrive at net profit or loss, Analyzing financial performance trends over multiple periods, and Comparing actual performance against budgeted figures.
Accurate bookkeeping is the foundation for a reliable Income Statement. You can also learn about Income Statement vs P&L distinctions in our blog.
The Importance of
Income Statement
The Income Statement is crucial for small business owners as it provides a clear picture of the company's profitability over a defined period. It helps owners understand how effectively their business is generating revenue and managing expenses. This statement is vital for making informed business decisions, such as identifying areas to cut costs, assessing pricing strategies, and determining the viability of products or services. Lenders and investors also rely heavily on the Income Statement to evaluate a company's financial health and performance before providing capital. An accurate P&L statement is a key component of sound financial planning. You can view an example Income Statement in our reports section.
Key Aspects of
Income Statement
Performance Over a Period
Unlike the Balance Sheet (a snapshot in time), the Income Statement covers a specific period (e.g., month, quarter, year), showing financial activity during that timeframe.
Revenue and Expense Focused
Its primary components are revenues earned and expenses incurred, ultimately leading to the calculation of net profit or loss.
Profitability Measurement
It's the main financial statement used to assess a company's profitability, showing how effectively it manages its resources to generate earnings.
Concepts Related to
Income Statement
The Income Statement is one of the three core Financial Statements, alongside the Balance Sheet and Cash Flow Statement. It details how Revenue is transformed into Net Profit (or loss) by accounting for Cost of Goods Sold (COGS) to arrive at Gross Profit, and then subtracting Operating Expenses, interest, and taxes. It directly reflects the Accrual Accounting principle of matching expenses with the revenues they helped generate.
Income Statement
in Action:
The Adventures of Coco and Cami
Follow Coco and Cami as they start to wonder if their businesses are actually making money after all their hard work and expenses.
Watch as Professor A introduces them to the Income Statement, explaining how it helps them see their revenues, deduct their expenses, and find out their profit or loss.