As a business owner, it’s important to measure the profitability of your company. Without knowing your business’s financial health, you risk spending more than you can afford and repeating mistakes. Create an income statement to find out your business’s profit or loss. What is an income statement?
What is an income statement?
The income statement is a report of your business’s profits and losses over a specific period. It is also called a profit and loss statement (P&L). You can use the income statement to summarize monthly, quarterly, or annual operations.
There are three main financial statements used to get a clear view of your business’s financial performance:
- Income statement
- Balance sheet
- Cash flow statement
Use the income statement to see the profitability of your business. Otherwise known as the bottom line, the last line of the business income statement tells you whether you have a net income or loss for the time period.
Income statement format
Knowing how to prepare an income statement will help you determine what expenses your business can cut back on, measure your strengths in sales, and see how much leftover money you have.
The income statement format can vary, depending on your business. However, all income statements begin with sales and end with your business’s net income or loss.
Parts of the profit and loss statement include the following:
- Cost of goods sold
- Gross profit
- Net income or net loss
The first section of an income statement is the amount of revenue your business generated through selling goods and providing services. You will subtract returns and sales discounts from the total amount earned from sales.
Cost of goods sold
You need to account for the cost of producing your goods or performing your services. Cost of goods sold (COGS) includes raw materials and direct labor expenses.
Gross profit is the amount after subtracting the COGS from your business’s revenue (Gross Profit = Revenue – Cost of Goods Sold).
There are many different expenses your business can incur, like employee salaries, office supplies, rent, interest, and professional fees.
Owing taxes comes with owning a business. Your company’s income tax liability will depend on things like sales.
Net income or net loss
The very last line of the income statement tells you how much of a profit or loss your business has during this time period. If the number is positive, the last line should read net income. If the number is negative, it should read net loss.
Knowing whether you have a net income or loss will determine changes you need to make to your business’s budget. When you have a net loss, work on cutting back expenses and increasing sales.
What is the purpose of an income statement?
As a business owner, creating an income statement will measure your business’s profitability and help with decision-making.
The three main financial statements all provide a summary of the business’s financial health. But, the purpose of an income statement is to show the business’s sales and net income. Use the income statement to assess your business’s profitability during a specific time period.
How to use the income statement
You can compare your income statements to figure out what makes your business profitable. For example, you might introduce a new product on April 22. Prepare an income statement after releasing the product and compare it to an income statement from the previous year.
If your income statement indicates that you have a net loss for the time period, you might need to take a look at your business’s budget. See which expenses you can cut out. Using the income statement, you can try new strategies to see how they affect your business’s profits.
Who benefits from seeing a small business income statement?
Some other people who want to see your business’s income statement include accountants, investors, and lenders. Accountants use the income statement to advise you on how to get your business profitable. Investors and lenders want to make sure your business is healthy before giving you money.
Income statement layout example
Here is a simple income statement:
At the top of the income statement, you will label the period of time the report covers. For example, you could say “For the four months ended December 31, 2016.”
In this example, the business has a net loss for this time period. The business owner can use this information to cut back on expenses and work toward increasing product sales.
Make sure you keep track of your business’s income and expenses. Patriot’s online accounting software is made for the non-accountant. You can complete your books easily. Try it for free today!
This article has been updated from its original publish date of 11/11/2014.
This is not intended as legal advice; for more information, please click here.