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.
are income statements used for?
You 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 also can 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, investors, and
vendors. They will use the financial reporting contained therein to
determine credit limits.
The sales figure represents the amount of revenue generated by the
business. The amount recorded here is the total sales, less any product
returns or sales discounts.
2. Cost of goods sold:
This number represents the costs directly associated with making or
acquiring your products. Costs include materials purchased from outside
suppliers used in the manufacture of your product, as well as any
internal expenses directly expended in the manufacturing process.
• Gross profit: Gross
profit is derived by subtracting the cost of goods sold from net sales.
It does not include any operating expenses or income taxes.
3. Operating expenses:
These are the daily expenses incurred in the operation of your business.
In this sample, they are divided into two categories: selling, and
general and administrative expenses.
Sales salaries: These are the salaries plus bonuses
and commissions paid to your sales staff.
Collateral and promotions: Collateral fees are
expenses incurred in the creation or purchase of printed sales
materials used by your sales staff in marketing and selling your
product. Promotion fees include any product samples and giveaways
used to promote or sell your product.
Advertising: These represent all costs involved in
creating and placing print or multi-media advertising.
Other sales costs: These include any other costs
associated with selling your product. They may include travel,
client meals, sales meetings, equipment rental for presentations,
copying, or miscellaneous printing costs.
Office salaries: These are the salaries of full- and
part-time office personnel.
Rent: These are the fees incurred to rent or lease
office or industrial space.
Utilities: These include costs for heating, air
conditioning, electricity, phone equipment rental, and phone usage
used in connection with your business.
Depreciation: Depreciation is an annual expense that
takes into account the loss in value of equipment used in your
business. Examples of equipment that may be subject to depreciation
includes copiers, computers, printers, and fax machines.
Other overhead costs: Expense items that do not fall
into other categories or cannot be clearly associated with a
particular product or function are considered to be other overhead
costs. These types of expenses may include insurance, office
supplies, or cleaning services.
4. Total expenses:
This is a tabulation of all expenses incurred in running your business,
exclusive of taxes or interest expense on interest income, if any.
5. Net income before taxes:
This number represents the amount of income earned by a business prior
to paying income taxes. This figure is arrived at by subtracting total
operating expenses from gross profit.
This is the amount of income taxes you owe to the federal government
and, if applicable, state and local government taxes.
7. Net income:
This is the amount of money the business has earned after paying income