Why is an income statement important? The most common reason is for the internal revenue service or C revenue officers to determine if the company is making money or losing money. The income statement provides an accurate reflection of a company’s net sales and operations over a specific period of time, usually one year. It is used primarily by CPA’s when preparing financial statements for their clients. In fact, most CPAs begin their income statement preparation with a basic income statement to provide a basis for creating the financial statements they will eventually prepare.
Income statement methodologies vary slightly from year to year. Generally, the most common format is to write it in balance sheet form using a four-column vertical bar for income from operations, assets, liabilities, and ownership equity. Occasionally, a further column called E includes gross selling, E-commerce, E-finance, and G in addition to O in a balanced sheet. A positive zero in the line-by-line column indicates that there were no gross-income receipts. A negative zero in the line-by-line column indicates that the company incurred an immaterial amount in the current year (e.g., a deduction for the year not included in the balance sheet).
The three parts of an income statement are similar, although there are a few differences in the financial reporting procedure. The basic principal report includes revenue, expense, and assets. Revenue is generally described as “the amount of cash generated from sales of goods and services”. This statement also includes gross selling, expenses, and an estimate of the gross profit. An income statement normally includes revenue and expense figures for each individual period. Sometimes, however, the statement will also include an income statement to supplement the description of income from operations for the year ending notice period.
An income statement also includes two items that are not reflected in the balance sheet: interest paid and interest earned by the business. Interest paid is described as “the total of payments made on loans or other advances” and includes interest paid on accounts receivable and accrued expenses. The income statement also includes the gross profit for the year. The difference between revenue and profit is referred to as net income. Net income is shown in the lower-right-hand corner of the income statement.
All income statements must be prepared in compliance with generally accepted accounting principles (GAAP). Most business owners are familiar with at least the major accounting methods (GAAP). However, small businesses may choose to use alternative accounting methods such as non-GAAP methods or reconciliation of net income statements with internal control (ICS) procedures. Some companies choose to include only statements of expenses in their income statements. For most businesses, however, it is important to report all relevant expenses.
The primary purpose of an income statement is to provide a Company with a summary of its activities for the year ended, including: revenues from sales of products or services to customers, income from services of workers to employers, and costs associated with ownership, development, and maintenance of assets. All expenses, gains, losses, and revenues are reflected in the income statement. The difference between revenue and expense is referred to as net income.
Except for the first paragraph of the profit and loss statement, all other paragraphs are considered part of the income statement. The first paragraph presents data related to the nature of the products or services sold, the price paid for the products or services, and the number of sales or services during a reporting period. Revenue and expense categories are usually specified according to the method of payment (such as on credit, debit, or sale) and whether payment is made in a single transaction or in various transactions over time. Data on customer relationships are also listed in the income statement.
The second paragraph of the income statement summarizes the income generated from the operations that support the bottom line. Net income, which is income from operations less expenses, is referred to as the operating profit. Expense income, which includes expenses for inventory, capitalizing property, and rent or lease payments, is referred to as cost of goods sold. Net income will include all of the revenue items listed in the first paragraph of the income statement; however, it excludes the first and last items (revenues and expenses). Other items, such as income taxes, are not reflected in the bottom line.