The income statement, also called the profit and loss statement, is a report that shows the income, expenses, and resulting profits or losses of a company during a specific time period. The statement summarizes a company's revenues and business expenses to provide the big picture of the financial performance of a company over time. The income statement is typically used in combination with a balance sheet statement. The income statement is the first financial statement typically prepared during the accounting cycle because the net income or loss must be calculated and carried over to the statement of owner's equity before other financial statements can be prepared.
The income statement calculates the net income of a company by subtracting total expenses from total income. This calculation shows investors and creditors the overall profitability of the company as well as how efficiently the company is at generating profits from total revenues.
The income and expense accounts can also be subdivided to calculate gross profit and the income or loss from operations. These two calculations are best shown on a multi-step income statement. Gross profit is calculated by subtracting cost of goods sold from net sales. Operating income is calculated by subtracting operating expenses from the gross profit.
Unlike the balance sheet, the income statement calculates net income or loss over a range of time. For example annual statements use revenues and expenses over a 12-month period, while quarterly statements focus on revenues and expenses incurred during a 3-month period.
Format of Income Statement
There are two income statement formats that are generally prepared.
Single-step income statement – the single step statement only shows one category of income and one category of expenses. This format is less useful of external users because they can't calculate many efficiency and profitability ratios with this limited data.
Multi-step income statement - the multi-step statement separates expense accounts into more relevant and usable accounts based on their function. Cost of goods sold, operating and non-operating expenses are separated out and used to calculate gross profit, operating income, and net income.
In both income statement formats, revenues are always presented before expenses. Expenses can be listed alphabetically or by total amount. Either presentation is acceptable.
Income statement expenses can also be formatted by the nature and the function of the expense.
All income statements have a heading that display's the company name, title of the statement and the time period of the report.
Income Statement - Things to Know
Net Income = Total Revenue - Total Expenses
The income that is generated by providing a service, selling a product, earning interest on investments, renting extra office space, licensing technologies, selling advertising space, or licensing the use of your brand name. In the income statement template, there are categories for Sales revenue, Service revenue, Interest revenue, and Other revenue. You will likely want to customize the Revenue section to highlight your company's main sources of revenue.
For a retail company, one of the main expenses is the cost of goods sold. For service businesses, this might not be such a large factor. Some of the other operating expenses may be advertising, salaries, rent, utilities, insurance, legal fees, accounting fees, supplies, taxes, etc.
In the multi-step income statement, the operating income is calculated as the Gross Profit minus the total Operating Expenses. In general, interest expense and income tax expense are not included as operating expenses, which gives rise to the term EBIT or "earnings before interest and taxes" - another name for Operating Income.
Income from Continuing Operations
This is the "bottom line", calculated as the Operating Income minus interest expense and income tax (and plus/minus non-operating revenues, expenses, gains, and losses, if there are any). If there are no "below-the-line" items, then this is the same as the Net Income.
Some forms of income, such as the sale of a building you are no longer going to be using, are included "below-the-line" (i.e. below the reported Net Income from Continuing Operations) because they may not be expected to occur in the future. These include the effect of accounting changes, income from discontinued operations, and extraordinary items (gaines or losses that are unusual or highly abnormal).
Income Statement References:
- Financial Accounting: Reporting and Analysis by M.A. Diamond, E. K. Slice, and J.D. Slice., 2000.
- Income Statement, Net Income or "Bottom Line" at wikipedia.org
- Income Statement at www.myaccountingcourse.com/financial-statements/income-statement