What is an income statement? An income statement or profit and loss statement is actually one of the two financial statements of a business and reveals the business’s gross revenues and expenditures over a certain period. It’s not as complex as you might think. Basically, it’s a two-page document that presents all of the income information for a business, in a simple, understandable format. It’s used primarily by bankers, tax professionals, and human resources professionals. In this article, we’ll take a quick look at what an income statement looks like and how you can use it to run your business better.
In order to understand what an income statement is, you need to understand what income taxes are. Income taxes are the amount of money a person makes over a specific time frame. They include federal, state, and local taxes, as well as payroll taxes, and other miscellaneous taxes. The second part, the profits made on a business, are also included in income taxes.
Basically, an income statement is an accounting summary of a businesses’ income and cash flows. It provides an accurate picture of the performance of the business, as well as providing management with important financial statements used to make decisions about the business. For example, a profit and loss statement tell management how much money the business made or lost during a certain period of time. This includes both gross and net profit figures. It also reports any sales and expenses that were made.
This section of an income statement is called the Cash Flow Statement. A cash flow statement, as the name implies, is a section that details cash that would be received or paid out for operations during a specific period of time. For instance, the balance sheet will show the difference between total assets and total liabilities at the end of one period and the beginning of another. This will be recorded as a current or operating income statement.
Income from sales, costs and revenue are all included in an income statement. The difference between the gross revenues collected and the gross expenses incurred is termed gross profit. The gross profit figure tells management how much profit the business made. The difference between revenue and expense is termed as net profit. This is an important portion of an income statement because it tells management what they should make from the sales and operating expenses and how much to pass on to the shareholders as profits.
Net revenues refer to revenues less the cost of good sold to cover the costs of production. This figure represents net income or the income before expenses are deducted. The gross profit figure provides a more accurate picture of how much revenue the business produces or loses. The gross profit statement provides management with the ability to determine if new advertising or upgrading equipment would help increase revenues. It also allows managers to adjust their plans to increase revenues if necessary.
The difference between an income statement and a revenue statement is that the income statement provides management with three times the data that is usually presented in a balance sheet. The top line shows what the company revenue is generated by the sales of goods and services and the bottom line shows what is lost through miscellaneous operations. Both figures provide management with an accurate picture of their company’s financial performance. A company that is generating revenue and losing money in equal amounts is a company that is not demonstrating sound business practices.
An income statement also includes one other item that is not reflected in a balance sheet and this is interest expense. A company may report interest expense on its income statement or a balance sheet separately due to differences in the method of measurement for interest expense. Many organizations use a single method of measurement for interest expense and it is important to be able to provide the appropriate data for such an item. Generally, if the method of measurement for interest expense is different from the method of measurement for profit or loss then the resulting data will be an income statement that does not reflect a separate revenue item.