There are three critical statements that should be included in every business reporting package: the Balance Sheet, the Income Statement, and the Cash Flow statement.
The Income Statement, sometimes called the Profit and Loss Statement, is a record of the revenues and expenses over a certain time period; monthly, quarterly, or annually. Remember that an Income Statement is a record of past events. It is used to see what happened in the past, not what will happen in the future.
While an Income Statement shows the profitability (or losses) of a company, it does not show the cash flow or position. A company may show a profit on the Income Statement, but if customers are late in paying, you prepay expenses, or you have loan payments, your cash position might be in trouble. That is why you need all three statements for a good evaluation of the health of your company.
The Income Statement is used by the owner of a business to determine how profitable the company was over a specific period of time. It is also used by investors to verify the company will provide a return on their potential investment. Finally, this statement is used by banks and other lenders to ascertain the ability of the company to repay any loans.
The Income Statement should be prepared monthly or at the very least, quarterly. Banks and investors will often ask to see prior year income statements to compare the growth and profitability of your company over time. The income statement is also used by your CPA to prepare your tax returns.
The Income Statement has three or four main components: revenues, cost of sales, general and administrative expenses, and other income/expense.
Revenues:
These can be detailed by sales categories. Products and services can be broken down by type.
Cost of sales (COS) / Cost of goods sold (COGS):
- If you manufacture products for sale, this includes the costs of raw materials, direct labor, overhead allocation, and freight costs.
- If you purchase products for resale, the costs of these products and related freight charges are included, as well as any inventory storage costs.
- If you sell services, your costs of labor for these services are included. Also include any benefits for this labor.
Gross Income = Revenues less COGS
Selling, General and Administrative Expenses (SG&A):
Salaries and wages (non-manufacturing), payroll taxes and benefits, rents, telecommunications, advertising, insurance, supplies, depreciation
Operating Income = Gross Income less SG&A expenses
Other Income (Expense):
Interest income, interest expense, gain or loss from sale of assets, bad debt expense
Earnings before taxes (EBT) = Operating Income plus Other Income less Other Expense
Provision for Income Taxes
Net Income (Loss)
A sample Income Statement:
Contact your accounting professional if you have more questions about financial reporting for your business.
