What Is an Income Statement?

An income statement is one of two financial statements of a business and shows the business’s profits and losses over a specific period. The other type is the statement of earnings, which provides an overall analysis of the business’s net income from a variety of sources. The income statement shows both income from sales and income from services. It does not show, however, the income from the investment, financing, or rentals.

Income statements are prepared in two different ways: as an income statement of an ongoing operation’s business, and as a balance sheet of an operation that generated revenues. Both forms share certain common elements, but they also differ significantly in other important areas. Generally speaking, an income statement includes the following items: gross revenues, inventory balances, current and long-term liabilities, equity (equity capitalized and retained), property and equipment, and payroll. The gross revenues item includes the value of goods sold less the amount of actual cash paid during the year. This includes the cost of products produced, transportation, and labor costs.

Inventory balances are a result of raw materials sold plus the cost of supplies used to make those supplies. In addition to gross revenues, inventory should also include the value of depreciated assets such as fixed assets, goodwill, and stock-based compensation. Current liabilities include the current collection and payment of accounts payable and accrued expenses. Long-term liabilities include a combination of Accounts Receivable and Accounts Payable, less the current accounts payable. Income statement data also includes a list of individual customers for the business as well as their payments. Their revenues, expenses, and balance sheets are included in the income statement.

Net income statement items that are directly related to revenues include income from sales of products and services and sales of leases, assets, and stock-based compensation. These items are reported on a net income statement rather than a gross statement. A net income statement only includes income from the end of one reporting period or quarter to the end of the next reporting period or quarter. The first reporting period is the reporting period for the taxable period and the second reporting period is the reporting period for the non-taxable period. A zero balance is usually entered if the business did not earn any revenue during the reporting period. If the zero balance is entered, then an additional zero is added to the balance for the reporting period.

Indirect expenses are expenses other than those listed in the income statement that were incurred by the business but not reported to the credit management unit. An example of an indirect expense is a charge card debt that was made by the catering equipment supplier and was not purchased by the credit management unit. Under the section entitled “Income from Continuing Operations,” a portion of income from continuing operations is recorded as an interest income. The interest income is reported only once, either during the reporting period or immediately afterward.

The gross profit line shows income from sales less charges for the direct and indirect expenses mentioned in the previous section. If the gross profit is greater than the cost of goods sold, more income is generated. Conversely, if the cost of goods sold is less than the gross profit, more income is generated. In an income statement example, the language that describes the relationship between the gross profit and the costs of goods sold is used: When a business sells a product to an end customer at a price less than the gross profit, it receives a credit for its selling cost and it owes a debt for the difference between the two prices.

Indirect expenses are expenses that did not contribute to the income of the company during a reporting period and that must be charged back or consolidated with the income statement. Examples include the following: miscellaneous expenses, advertising expenses paid to employees. Consolidation occurs when all of these charges are added to the income statement and become a single line item. The operating income statement is usually included separately from the income statement.

The final section of an income statement is the net income statement, which consists of the gross profit, net income per line item. Line items are items that are drawn from the gross profit to deduct the expenses associated with production during the reporting period. This can include such things as labor and plant expenses. Net income per line item is the net income from line item derived from the gross profit less any overhead charges and taxes.