Your business’ income statement (also referred to as a statement of earnings, statement of operations, statement of income or profit & loss P&L statement) is one of the most important statements for you to understand.
It shows the revenue your business has earned and the costs you have incurred over a specified period of time. The result of this information is your net income (or loss) for that period, which tells you just how profitable your company is.
A basic income statement will show:
- Revenue – all of the money you bring in.
- Expenses – all of the money you have paid out.
- Net profit – total income after all expenses.
SAMPLE – BASIC INCOME STATEMENT
|
Sales |
100,000 |
|
Interest Income |
2,000 |
|
Total Revenue |
102,000 |
|
|
|
|
Expenses |
|
|
Cost of Goods Sold |
25,000 |
|
Wages |
30,000 |
|
Rent |
20,000 |
|
Advertising |
2,000 |
|
Interest Expense |
1,000 |
|
Taxes |
5,000 |
|
Total Expenses |
83,000 |
|
|
|
|
Net Income |
19,000 |
But many businesses use a multi-step income statement format. This format shows four measures of profitability:
Gross Income – total income after costs of goods sold, which are the costs you incur to create your products or services.
Operating Income – gross income less general expenses (i.e. selling, general and administrative expenses).
Pretax Income – operating income after non-operating income and expenses (income not earned in the normal course of business such as interest income and expenses not incurred in the normal course of business such as interest expense).
Net Income – Pretax income less income tax.
SAMPLE – MULTI-STEP INCOME STATEMENT
|
Revenue |
|
100,000 |
|
Cost of Goods Sold |
|
25,000 |
|
Gross Income |
|
75,000 |
|
|
|
|
|
Expenses |
|
|
|
Wages |
30,000 |
|
|
Rent |
20,000 |
|
|
Advertising |
2,000 |
|
|
Total Operating Expenses |
|
52,000 |
|
Operating Income |
|
23,000 |
|
|
|
|
|
Non-Operating Income and Expenses |
|
|
|
Interest Income |
|
2,000 |
|
Interest Expense |
|
(1,000) |
|
Total Non-Operating Income and Expenses |
|
1,000 |
|
Pretax Income |
|
24,000 |
|
|
|
|
|
Income Tax |
|
5,000 |
|
Net Income |
|
19,000 |
You can go even further by breaking down your revenue. If, for example, you own a restaurant, your revenue types may include food and drink.
SAMPLE – INCOME STATEMENT WITH EXPENDED REVENUE AND COST OF GOODS SOLD
|
Revenue |
|
|
|
Food Revenue |
50,000 |
|
|
Drink Revenue |
50,000 |
|
|
Total Revenue |
|
100,000 |
|
|
|
|
|
Cost of Goods Sold |
|
|
|
Food Costs |
15,000 |
|
|
Drink Costs |
10,000 |
|
|
Total Cost of Goods Sold |
|
25,000 |
|
Gross Income |
|
75,000 |
|
|
|
|
|
Expenses |
|
|
|
Wages |
30,000 |
|
|
Rent |
20,000 |
|
|
Advertising |
2,000 |
|
|
Total Operating Expenses |
|
52,000 |
|
Operating Income |
|
23,000 |
|
|
|
|
|
Non-Operating Income and Expenses |
|
|
|
Interest Income |
|
2,000 |
|
Interest Expense |
|
(1,000) |
|
Total Non-Operating Income and Expenses |
|
1,000 |
|
Pretax Income |
|
24,000 |
|
|
|
|
|
Income Tax |
|
5,000 |
|
Net Income |
|
19,000 |
With your income statement, your goal is to keep your net income (i.e. your profitability) in the black, which means that it is a positive number. This is done by increasing your revenues and managing expenses.
By reviewing your income statement, especially in comparison to other periods, you may be able to find expenses you can cut back on or revenue opportunities that need more attention, which will further improve your profitability.
Interested in learning how you can use your income statement to better improve your profit margins? Get in touch with Koroll & Company today. Our team of chartered professional accountants would love to help.
