An INCOME STATEMENT, otherwise known as a profit and loss statement, is a summary of a company’s profit or loss during any one given period of time, such as a month, three months, or one year. The income statement records all revenues for a business during this given period, as well as the operating expenses for the business.
You can use an income statement to track revenues and expenses so that you can determine the operating performance of your business over a period of time. Small business owners use these statements to find out what areas of their business are over budget or under budget. Specific items that are causing unexpected expenditures can be pinpointed, such as phone, fax, mail, or supply expenses. Income statements can also track dramatic increases in product returns or cost of goods sold as a percentage of sales. They can also be used to determine income tax liability. It is very important to format an income statement so that it is appropriate to the business being conducted.
Income statements, along with balance sheets, are the most basic elements required by potential lenders, such as banks, FSA, or investors. They will use the financial reporting contained therein to determine credit limits. Also when applying for credit with a new company, this information will also be very useful.
Items that appear on income statements will consist of sales, cost of goods sold, operating expenses, sales salaries, collateral and promotions, advertising, rent utilities, depreciation, and all other overhead costs. This results in depicting the total expenses. This is a tabulation of all expenses incurred in running of the business, exclusive of taxes or interest expenses on interest income, if any. Net income, before taxes, represents the amount of income earned by a business prior to paying income taxes. This figure is calculated by subtracting the total operating expenses from the gross profit. Taxes also appear on the statement which results in Net Income or the amount of money the business has earned after paying income taxes. That is, Gross Profit – Total Operating Expenses = Net Income.
The income statement has several components. The income statement summarizes the results of a business’s or company’s operation for the accounting period. This statement is alternatively referred to as a statement of income, statement of earning, or statement of operations. It is generally recognized to be the most important financial statement in an annual report. In corporate accounting, many times we see the support between the balance sheet and income statement called the Retained Earning Statement. Most generally in Ag banking, this document is not required. An income statement is just exactly what it is stated as, a summary of an entity’s expenses and revenue for a given period of time. This time frame is generally a calendar year.
The excess of the revenue over the expenses incurred in earning the revenue is called Net Income / Net Profit. If the expenses of the operation exceed the revenue, the excess is called a Net Loss. It is ordinarily impossible to determine the exact amount of expenses incurred in connection with each transaction, therefore, the entire operation is looked at basically at the same time each year to tell whether the operation is performing in a positive pattern or not.