The income statement, along with the balance sheet and the cash flow statement, is one of the most important financial documents produced by your business. But how do you prepare an income statement? Find out everything you need to know about the format of an income statement with our comprehensive guide. We’ve also put together an income statement template (below) so that you can see how this type of financial document works in the real world.
What is an income statement?
To help you prepare an income statement, first, let’s go over the definition. Income statements, also referred to as profit and loss (P&L) statements, provide a summary of your company’s income and expenses over a specific period. It includes revenue, expenses, gains, losses, and the resulting net income from the period the statement covers. In other words, the income statement helps you to understand whether your business has made a profit or a loss. This can give you an excellent insight into your firm’s financial health over a given period.
What do you need to include in an income statement?
Before you can prepare an income statement there are a few things you will need. Income statements include a broad range of items, including revenue, net revenue, cost of goods sold (COGS), gross profit, expenses, net income, depreciation, and earnings before interest, taxes, depreciation, and amortization (EBITDA). In many cases, this financial data will be divided into individual line items to improve the granularity of your reports. For example, expenses may be broken down into wages, procurement costs, etc.
How to create an income statement
Knowing how to prepare an income statement is crucial. While you can use an income statement template, as below, it may also be a good idea to explore how to prepare an income statement by hand. Here’s a simple, step-by-step guide:
Select a reporting period – Firstly, you’ll need to select the period you want the income statement to cover. Most of the time, income statements are produced on an annual, quarterly, or monthly basis. Creating monthly reports can help you identify trends on a granular level and improve your profits/expenditures.
Produce a trial balance report – Next, you should prepare a trial balance report (an internal document listing all the account balances in your general ledger). Generally, you should be able to generate these reports using your accounting software.
Work out your revenue – Now, it’s time to work out your business’s revenues. To do this, add up the revenues from your trial balance report and enter the final amount in the revenue line item.
Calculate the cost of goods sold – It’s also essential to determine the cost of goods sold, a figure which includes materials, direct labor, overheads, and so on. Add up all the amounts from your trial balance report and list them in the COGS line item.
Work out your gross margin – Subtract the cost of goods sold from revenue to work out your gross margin.
Add your operating expenses – Once again, you’ll need to add up all the operating costs included in your trial balance report. This item is usually split up into selling and operating expenses and general and administrative expenses.
Calculate your income – Work out your income by subtracting your operating expenses from your gross margin.
Add your income taxes – Now, after you’ve factored in any other income streams, it’s important to apply income tax to find out how much money you’ll actually be left with.
Determine your net income – Finally, you can determine your net income by subtracting your income tax from your pre-tax income.
Income statement example
Now that you know a little more about how to prepare income statements, it may be beneficial to explore the format of an income statement in more depth. To do that, we’ll need to see an income statement example. Here’s an income statement template for a fictional company:
|Revenue Stream 1||£700,000|
|Revenue Stream 2||£700,000|
|Revenue Stream 3||£700,000|
|Revenue Stream 4||£700,000|
|Total Net Revenue||£2,000,000|
|Cost of Goods Sold||£500,000|
|Depreciation & Amortization||£300,000|
|Earnings Before Interest & Taxes||£415,000|
There are plenty of other income statement examples available online. Check out this example of an income statement template for one year from Microsoft Office.
Income statement vs. balance sheet
Finally, when it comes to income statements vs. balance sheets, there are a couple of clear differences. Whereas the income statement records your income and expenses, the balance sheet covers your business’s liabilities, assets, and equity. It’s also important to remember that income statements cover a specific period. In contrast, the balance sheet provides a snapshot of what your business owns and owes at a single point of time.
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