Understanding the Income Statement
How much profit is your business generating? An income statement is a quick glance at your business's financial position. Below we will break down the income statement and its components.
What is the income statement?
The incomes statement is also referred to as the profit/loss statement or P+L. This statement shows you how profitable your business is at a given moment in time. The income statement is one of the three major financial reports included in the context of financial statements.
These reports can be requested by banks or investors before any financial decisions regarding loans or investments are made.
Income Statement Example:
A free template is available here
Below is an example of an income statement:
Components of the Income Statement:
Revenue from sales
The top of the income statement shows the sales revenue from each product or a summary of all products sold. How this is reported depends on your type of accounting method. Whether you use cash or accrual method accounting, sales revenue is always shown at the top.
Cost of Goods Sold (COGS)
Cost of goods sold is the total amount of money paid out for the supply of goods sold. These expenses include the expenses directly associated to the sale of products to your customers. Direct materials, shipping, labor, etc. to name a few.
General operating expenses are categorized separately on the income statement.
To determine gross profit, you must subtract the total sales from the total COGS. This is the profit before overhead costs are taken into consideration.
Operating expenses are all the general business costs not directly related to a product but rather the business. These expenses include: advertising costs, bank Fees, consulting fees, rent, utilities, etc. These are the expenses necessary to continue running your business.
Operating expenses are listed on the income statement in two ways. They can be summarized under selling expenses, general and administrative expenses supporting schedules or they can be broken down by expenses.
Operating income is the difference between gross profit minus operating expenses. This is how profitable your business is after taking into consideration overhead costs. This is your income before taxes.
Non-Operating Expenses and Income
Other income and expenses listed on the income statement include interest expense or interest income generated from loans or interest bearing.
Income Before Tax
This is your income before your taxes are calculated if you're a corporation.
If you're a pass through corporation like a schedule S or an LLC that gives K-1's at year end, it will be taxed at your personal level.
Income Tax Expense
This is your tax expense if you're a C-corp for the income to your business.
Net Income (Loss)
This is the total profit or loss for your business. After all of the possible expenses are reduced, this is what you have left over.
Some businesses don't require a full income statement to display their income and expenses.
For pass through companies such as S-Corp and LLC's that either go on your K-1 or Schedule-C, all you need is a single-step income statement.
Single-step Income Statement
A single-step income statement is simple. There aren't any federal income taxes to calculate since it is calculated at the personal income tax level.
Creating accurate financial statements can be difficult. A qualified bookkeeper or accountant can help you generate accurate financials and help you understand them too. If you need help creating these reports, book a free consultation. We will be honored to help you understand your business's finances.