An income statement is a critical financial statement for reporting a business's financial performance. It can also be referred to as a revenue and expense statement.
Main Takeaways of an Income Statement
An income statement reports financial performance over a designated accounting period. The formula for it is to take the total revenue and gains and then subtract the total expenses and losses. That gives you the total net income.
Net Income = Revenue - Expenses
An income statement gives important insights into a business's operations. It shows underperforming sectors, the efficiency of operations, and the efficiency of management. It also reveals information about a company's performance in comparison to competitors.
Gains and Revenue
Gains and revenue are included in an income statement. However, its format can vary. It varies depending upon the scope of the business, associated and local regulatory requirements.
Operating Revenue and Non-Operating Revenue
Operating revenue comes from primary activities. Whether you are a retailer, distributor, or wholesaler, revenue is achieved through the sale of a product or service. Operating revenue is the money received through the exchange of money for services or products.
Non-operating revenue comes from secondary business activities. It is considered non-operating recurring revenue. This revenue comes from activities outside the sale of a service or product. It may be income from earned interest, income from business partnerships, or income from advertisements placed on properties.
Gains are considered other income. It can be income from none business activities, income from selling business equipment, or income from selling long-term assets.
It is important not to confuse revenue with receipts. Receipts are accounted for when money is received. Revenue is the money accounted for in a specific period, such as when goods or services are delivered.
Losses and Expenses
Expenses are the costs for a company to continue operating and make a profit. Some expenses may be written off when they meet IRS guidelines.
Primary Activity Expenses
Primary activity expenses include amortization or depreciation, administrative expenses, the cost of goods sold, and development and research expenses. Common items that make up this list include expenses for your utilities, sales commissions, and employee wages. Secondary activity expenses include things like interest paid on loans. Losses as expenses include things like money for lawsuits and the loss of money from long-term assets.
Primary revenue and expenses give insight into the company's core performance. Secondary revenue gives insight Into the company's management performance.
The Purpose of an Income Statement
The purpose of an income statement is multi-faceted. It details a company's profitability for stakeholders. It gives the internal financial information to compare against other sectors. It also allows a company to check the progress of current operations. With an accurate income statement, companies can make decisions on assets, sales, new geographies, ramping up new production, and shutting down a product line.
The bottom line is that an income statement gives a company deep insight into many aspects of the company's business. A company can see which areas are causing a loss and profits with an income statement. If you are unsure about how to do an accurate income statement for your company, consider hiring an outside professional to do this task for you. There are many companies out there where you can outsource this task to.