What Is an Income Statement?
An income statement, also referred to as the profit and loss statement, statement of operations, or statement of income, is a report prepared by the management of the company and is one of the four main financial statements that are issued by company, namely balance sheet, income statement, statement of owner's equity, and statement of cash flows. The items presented in an income statement are the revenue, expenses, and income or loss for a certain calendar or accounting period. These items reflect the profitability of the company during that specific time period.
How to Write an Income Statement
Preparing the income statement is pretty easy if only you have a guide that will simplify the steps in creating one. The good news is we present to you the concise steps in creating an income statement below.
1. Compute the Revenue or Sales
Firstly, calculate the revenue or sales of your company by multiplying the units sold by the sales price. Note that although you have not yet received the payment in cash, you still need to include the receivable amount in your revenue or sales as you will still receive that amount some time in the future.
2. Deduct the Cost of Goods Sold from the Revenue or Sales
The cost of goods sold represents the cost that covers the purchase of your products for sale, for a merchandising company, or the cost of raw materials and direct labor, for the manufacturing company. After determining the cost of goods sold, deduct this amount from your revenue or sales to arrive at the gross profit amount.
3. Deduct the Selling and Administration Expense and Depreciation Expense
From the gross profit, deduct your selling and administration expense as well as your depreciation expense to arrive at the operating profit or earnings before interests and taxes. Selling and administration expenses are those expenses that are not related to the manufacturing of your goods, for example, telephone, office expenses, water bills, etc. Depreciation expenses, on the other hand, is an expense related to a certain asset that will diminish its value over time. For example, if you acquire a building, there must be a corresponding depreciation expense that you must record in your financial statement every year.
4. Deduct the Interest Expense
The interest expense is computed by multiplying the principal amount of your debt by its interest rate. Deduct this amount from your operating profit to arrive at the earnings before taxes.
5. Deduct the Tax Expense
Deduct from your earnings before taxes the amount you pay in federal, state, local, and payroll taxes to arrive at the earnings available to common shareholders.
6. Deduct the Dividend Expense
If you are taking a salary from your business or you have investors in your company, you must deduct the dividends from the earnings available to common shareholders to get the net income of your company, the money you have left to reinvest into the firm.