What is an Income Statement?

So just what is an Income Statement?

As a new small business owner the income statement for your new business is going to be one of the reports that you spend a lot of time reveiwing. You will probably experience quite a bit of worry and anguish and perhaps a little glee when you read through this statement, particularly during the first twelve months of operation!

So what is it?

The Income Statement is also sometimes called a Profit and Loss Statement and it is basically a representation of the net results of the small businesses operations over a specified period of time, usually a month, a quarter or for a full financial year.

The statement is generally compiled on a double entry bookkeeping or accrual accounting basis, so that the revenues reported are matched with the expenditure incurred to generate the sales. The amount of profit or loss reported in the statement comprises of net revenues less expenses for the period and this is the part of the statement that most small business owners concentrate on!

Note: Net revenues are total sales less any discounts, returns and items like sales tax.

Although the net profit or loss before tax is an important figure, this statement can provide you will a much clearer picture of how your business is operating if you analyse the detail contained in the statement.

The Profit and Loss or Income Statement reports on four types of activities:

• the cost of producing or manufacturing the goods or services sold by the business,
• the expenses incurred to market, distribute the product or service to the customer and the administrative costs of running the business,
• the financing costs of the business, for example interest or dividend costs, and of course,
• the income earned by the small business during the reporting period.

The cost of producing or manufacturing the goods or services sold by the business typically includes the purchase of stock items for resale, raw materials, direct labour and direct manufacturing costs for businesses that produce goods themselves, and the cost of inwards freight. Basically you include any costs related to getting your product ready for sale that you can identify and trace directly tothose products.

The financing costs of the business include any interest paid on loans (start-up financing or loans for capital equipment etc), hire purchase costs, and dividends paid to investors.

The operating costs include pretty much everything else except extra-ordinary items, or expenses incurred that do not fall within the normal operations of the business. This type of expense would include things like writing off obsolute inventory or revaluing assets - and do not normally occur in the first twelve months of operation.

The income earned by the small business during the reporting period is just that and would include revenue generated through the sale of goods and services to your customers, freight income, any commissions earned etc less any sales returns, discounts and sales tax.

What is an Income Statement Layout

The usual layout for an Income Statement is:

Sales or Income

Less Cost of Goods Sold

Equals Gross Profit or Loss

Less Operating Expenses
Less Financing Costs
Less Income Tax

Equals Net Profit or Loss

I hope the information on this page has provided an answer to what is an income statement? For more information on financial statements will be coming soon!

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