Income statements are one of the four main financial documents. They detail a company’s income and expenses over a specified period, typically annually or quarterly. Sometimes they are referred to as profit and loss statements or P&Ls. They can be used to monitor your company’s performance, make strategic financial decisions, maintain compliance and secure loans or funding.
What To Include in an Income Statement
While what’s included can vary depending on the nature and complexity of your business, a typical income statement consists of four key elements.
- Revenue: How much money a business took in during a reporting period
- Cost of Goods Sold: Direct and indirect costs of producing and selling products or services (labor, materials and production)
- Operating expenses: Recurring and one-time costs associated with running your business (office equipment, marketing, rent, interest payments, legal and consulting fees)
- Net income: Final profit after deducting all taxes and expenses
Preparing Your Income Statement
In just a few steps you can create a basic income statement for your organization. Most of the information you’ll need can be found on your organization’s general ledger, expense reports, revenue records, and tax filings.
1. Choose Your Reporting Period
An income statement is used to report income and expenses over a specific period, so the first step is to pick your reporting period. Monthly, quarterly, and annual reporting periods are all common, but the one that’s right for you will depend on your goals.
A monthly report will make it easier to apply strategic adjustments that affect the next month’s business activities, whereas a quarterly or annual report provides a higher level analysis for long-term trending.
2. Calculate Total Revenue
Add up all the income earned for your reporting period. This should include income for sales of goods and services, interest and rental income.
3. Calculate Cost of Goods Sold (COGS)
Your COGS is all direct and indirect costs associated with producing and selling goods and services including labor, material, parts and distribution.
4. Calculate Gross Profit
Your gross profit is the amount earned before deducting your operating expenses. It is calculated by subtracting your COGS from your total revenue.
5. Calculate Operating Expenses
Next, you’ll calculate your operating expenses, sometimes abbreviated to OPEX. These are costs that are indirectly related to keeping your business up and running and include things like rent, utilities, overhead, office supplies, salaries, and legal fees.
6. Calculate Operating Income
This is essentially your pretax income for the reporting period and can be referred to as earnings before interest and taxes or EBIT. You calculate it by subtracting your operating expenses from your gross profit.
7. Other Income, Interest & Taxes
Now that you have your total income, you can figure out your interest, or non-operating income and expenses, and tax charges. You’ll add any interest earned and deduct any interest owed to determine your income before taxes.
Then you’ll want to calculate your total tax burden for the reporting period as well. This includes local, state and federal taxes as well as any payroll taxes.
8. Calculate Net Income
Your last calculation is to determine your net income. This represents your organization’s overall profit or loss for the reporting period. To do this, subtract interest and then taxes from your operating income or EBIT. These are your available funds.
Get Accounting Help for Your Small Business
While an income statement can provide valuable insights into how your business is doing, they aren’t always the easiest to prepare or understand. But we can help. We are a licensed accounting firm with an office located in Gallup, New Mexico. We provide businesses and individuals with high-quality professional accounting including monthly financial statements, bookkeeping, tax strategies, and financial management solutions. Spend less time managing your finances and more time growing your business with Arsenault CPA Firm. Contact us today for a free consultation.