An income statement, also known as ‘statement of revenue and expense’ or the ‘profit and loss statement’ is a business document that showcases the revenues and expenditure of a given trading period. It is one of the three most crucial business documents alongside a statement of cash flows and the balance sheet. Many jurisdictions demand that the statement is prepared for the purposes of taxation and accountability. Knowing how to prepare it is, therefore, a crucial step to take.
We have prepared the entire length and breadth of the discussions that follow towards just that. Read through to gain the inspiration you need.
How to Prepare an Income Statement
- Print trial balance. Choose a suitable accounting software and print the “trial balance.” It is this that summarizes the ending balance of every account that is contained in the general ledger.
- Determine revenue amount. Next, add up all the items that fall in the revenue line of the trial balance. Insert the results you will have achieved in the revenue line of the income statement.
- Determine cost of goods sold amount. Move on to ascertain the costs of goods sold and the associated amounts. Knowing the costs of goods sold will let you get to anticipate the levels of income you are more likely to accrue with your use.
- Compute the gross margin. Compute the gross margin now. This, you do by subtracting the cost of goods sold from the revenue figures. It denotes the amounts of money earned from the sales of services and products.
- Determine the operating expenses. Operating expenses are those that you incur while supplying the goods and the services to the intended audience. You determine them by adding all the overhead expenses that you generally incur on a trading period.
- Calculate the pre-tax income. Finish off now by calculating the income. You determine this principally by adding the selling prices to the administrative expenses and subtracting this sub-total from the gross margin. Insert this at the bottom of your income statement.
Business Income Statement
Company Income Statement
- MS Excel
Household Income Statement
Monthly Income Statement
Multiple Step Income Statement
Non Profit Income Statement
Pro Forma Income Statement
Projected Income Statement
- MS Word
Restaurant Income Statement
Small Business Income Statement
Standard Financial Statement
Purpose of Income Statement
- Showcase the profits or losses. Its main purpose is to showcase the profits and losses of the business. That is because of the fact that it sums all the expenses incurred in the trading period against the incomes that were generated in the same time period. Thus, it gives the readers a rough clue of the level of income the business generates.
- Trace the origins of the profits and losses. Other than merely stating the levels of profits and losses, the statement also traces the origins thereof. This it does principally by breaking down the profit levels and the expenses that lead up to the final outcomes. That way, it makes it easier for you to get to know and appreciate your income sources.
- Aids with follow-ups and references. The statement also makes it possible for you to make follow-ups and references. That is because you may store it in place and refer to it at a later date. Thus, it also serves to facilitate any disputes should litigation arise in the course of its interpretation.
- Detects and combat fraud. As a final benefit, the statement also detects and combats fraud. This is mainly because of its ability to store the necessary records well and make them available at a later date. It is highly unlikely that any amount of money may get lost in the process.
Components of Income Statement
- Revenue and sales. It is the amount of money that is generated by the goods you sell to the clients. Some firms do have multiple streams of revenue. In this case, each revenue stream has to be delineated and displayed vividly.
- Cost of goods sold. This is the amount of money which was incurred in the course of selling the goods to the clients. The costs are two-fold. These are direct and indirect. The former includes labor, materials, and parts while the latter includes depreciation.
- Gross profit. It is the profit before tax. The profit is arrived at by subtracting the cost of goods sold from the sales revenue.
- Marketing, advertising, and promotion express. Most businesses will definitely incur some expenses to sell their products to the masses. Many of these expenses are incurred to advertise, market, and promote the goods.
- General administration expenses. Other than the expenses we have delineated above, each firm has to incur some other expenses to stay afloat. These are wages, salaries, office administration and rents. They too have to be explained clearly.
- Earnings before interest, tax, depreciation, and amortization. This is an income that is arrived at by subtracting the selling, general, and administrative expenses from the gross profit. It is this one that is used as the basis for taxation later on.
- Operating income. Also called the earnings before interest and tax, this is the revenue that is generated from the day to day business operations. It hence represents the profits of the business before any non-operating income, taxes, interests, and other non-operating expenses are deducted from the revenues.
- Interests. There are two types of interests. These are the interest expense and interest incomes. The interest expense is the amount of money that is payable on any borrowings while the interest income is that which is earned over a given trading period.
- Other expenses. Each business is unique in that it comes with its own fair share of expenses that are distinct and separate from the other businesses in its area of operations. Foreign exchange fluctuations, capital gains and losses, impairment charges, and stock-based compensation are top examples of these.
- Earnings before tax. This is also called the pre-tax income. It is arrived at by subtracting the interest expense from the operating income. It is from it that the net income is derived later.
- Income taxes. These refer to the various charges that are levied on the pre-tax. These sum total of these incorporate both the future and the present taxes.
- Net income. The net income is the final income that the business eventually takes home at the end of the trading period. It is arrived at by subtracting the income taxes from the pre-tax income. It is the amount that eventually trickles into the retained earnings on your balance sheet.
Types of income statement
A.) Classified income statement
This refers to a financial report that displays the expenses, revenues, and profits which are classified into several expenses and revenue streams. The purpose of this formatting is to make it easier for anyone, even those who lack the technical knowhow to easily comprehend the final outcomes.
It has four main sections namely:
- Operating revenues
- Cost of goods sold
- Operating expenses
- Non-operating revenues and expenses
B.) Comparative income statement
The ‘comparative income statement’ juxtaposes multiple periods of revenue inflows with the aim of assessing the performance of the company over a fixed period of time. This statement helps potential investors to weigh in on whether a company is worth investing in or not. It showcases:
- Income statements of various financial periods
- Trends or graphs of the performance of the company
- A company’s performance juxtaposed with that of another one in the same period
- Breakdown of the revenue inflow and expenses
C.) Condensed income statement
As its name implies, this is an income statement that summarizes a voluminous statement in finer details. Just as the comparative statement above, it similarly aims at making these financial instruments easier to comprehend. The document contains the standard contents of a statement of this kind. These are:
- Amounts earned over a given period of time
- Operational expenses accrued over the same period
- Pre-tax earnings and other associated obligations
- The net profit earned in that time frame
D.) Contribution margin income statement
A ‘contribution margin’ is the difference between the selling price per unit and the variable cost per unit. It reveals the segment of the sales revenue that is not consumed by the variable costs. This statement displays a breakdown of these figures and the final contribution at the end of the page.
It contains the following figures:
- Selling price per unit
- Variable cost per unit
- Net profit/net loss
E.) Single step income statement
This is a statement that does not break down the expenses or incomes in categories. It merely delineates all of them in two columns. One column handles the incomes while the other the associated expenses. Thus, it is simpler to interpret and make meaning of though it is not really conclusive.
Below are some of the
F.) Partial income statement
A ‘partial income statement,’ as its name implies denotes the financial information of only a part of rather than the whole of the accounting period. This document is mainly prepared if an unusual expense or income is accrued within a trading period. For instance, when a business expands by acquiring another.
The following are its contents:
- An exceptional expense incurred by the company
- Any tax liabilities accruable in the process
- The impact of that unusual expense on the overall profits
- How to cater for the new set of challenges
G.) Cash basis income statement
Lastly comes the ‘cash basis income statement.’ contained in this statement are revenues that have come in the form of cash mainly from clients and other expenses for which cash has been used to settle. Thus, it disregards checks, money orders, digital currencies and other forms of non-monetary income streams.
- Cash-based incomes
- Cash-based expenses
- Any other incidentals that are remitted via cash
Now you know all you may have about the income statement template. With this firm knowledge, we are now truly confident that you can utilize the statements better than average. Why don’t you now go ahead and do just that? It is definitely wise to share the information with many others.