How do you know that a company or business is faring well? A company’s financial performance is reported through three important documents called financial statements. These three financial statements are the balance sheet, the cash flow statement, and the income statement. If you want to know the financial health status of a company, then you can consider checking out its income statement.
What Is an Income Statement?
An income statement is one of the financial statements used to report the financial performance of a company over a specific accounting period. The primary focus of the statement is the revenue and expenses of the company. That is why it is also known as the profit and loss statement or the revenue and expenses statement. Income statements provide a summary of the expenses and sales of a company every quarter and year. You can identify if a statement is an income statement through the document’s heading. For example, “For the fiscal year ended October 30, 2019.” The company submits this performance report to the Securities and Exchange Commission or SEC.
Revenue, expenses, gains, and losses are the four key items that income statements focus on to come up with the net income. The formula to get the net income is the sum of the total revenue and gains minus the sum of the total expenses and losses. Income statements do not cover the money that is received and paid by the company or business. Money that is received by the company is not considered a revenue because it is not something that is earned. Through income statements, you’ll be able to take a look at how efficient the company is, learn of its performance in the relative industry, and identify which sectors of the company are under-performing.
FREE 11+ Income Statement Samples and Templates
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How to Prepare an Income Statement
There are a couple of things you need to prepare to make an income statement. Preparing an income statement is an accounting task, and they are done better by certified accountants. However, it’s still possible to learn the process even if you’re not a certified accountant or an expert on that field. Here are simple steps that will show you how.
1. Choose a Reporting Period
Reporting of income statements can be done annually, quarterly, or monthly. You just need to choose which accounting period you want to make a report. Businesses who do public trading are required to report their income statements quarterly. For small businesses, monthly reporting is an advantage as it will help them identify trends in terms of profits earned and expenditures. Such information can help in making sound decisions to make the company more profitable.
2. Print a Trial Balance Report
A trial balance is a document that will give the end balance figures you need to make an income statement for your business or company. It is an internal document that is made up of a list of end balances of all the accounts in a general ledger for a specific accounting period. Printing a standard trial balance report will help you prepare the income statement.
3. Determine the Amount or Value of the Items
This is the part where you need to do a couple of simple calculations. You’ll need to determine the total revenue, the cost of goods, the gross margin or the gross amount earned from the sale of products and services, and the operating expenses.
4. Calculate Income and Income Tax
The formula to calculate the income of your business is gross margin minus the selling and administrative expenses. This will give you a value for a pre-tax income, so you’ll need another formula to calculate the income tax for your business. The formula to calculate income tax is applicable state tax rate times the pre-tax income.
5. Calculate the Net Income
Use the formula: Net income = (Revenue total + gains) – (Total expenses + losses) or Net income = Gross income – Expenses.
6. Finalize the Income Statement
Now that you have all the information necessary to create an income statement, the next step would be making the final output. Income statement templates, like the samples provided in this article, will help you make a reliable and presentable income statement report. Review your calculations and make sure to enter the figures in their respective places in the statement.
What are the other components that make up an income statement?
Aside from the components mentioned, other elements of an income statement include marketing, advertising, and promotion expenses; general and administrative expenses; earnings before interest or EBITDA; depreciation and amortization expenses; operating income or EBIT; interests and other expenses; and EBT or pre-tax income.
What is the difference between a balance sheet and income statement?
A balance sheet is a financial document that shows a snapshot of the finances of a company as of a specific date, which is not necessarily an accounting period. It reports on the assets and liabilities and equity of a company or business. It is also used in analyzing if the liquid assets of a company are enough to cover its obligations. An income statement, on the other hand, provides a summary of the financial activity over an accounting period. It focuses on revenue and expenses and is used to report how much the company is earning.
What is included in the cost of goods?
The cost of goods includes the cost of materials and direct labor costs, as well as the cost of overhead expenses that the company or business incurred to provide certain goods and services.
What you need to make a simple income statement are samples and templates that will guide you in the preparation and finalizing of your output. You’ll also need a little knowledge of the basic concepts in accounting to help you understand what you are doing. You can find all these here. Feel free to view and download the samples and templates above!
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