What is an income statement?

An income statement is a summary of a company’s profit and loss over a specific time period usually a full year or part of the year. In fact the income statement is also called a profit and loss statement or P & L. An income statement shows the income earned and expenses paid by a business during the period being reported. Overall it helps you determine how well the business is doing by showing what kind of sales were made how many returns there were, what it cost to run the business, whether there were unexpected expenses and what your income tax liability will be. Have a look on a sample small business income statement below;

Income Statement Small Business

Let’s discuss the specifics sections of an income statement. You can think of an income statement using the simple formula:

Revenue − Cost of Goods Sold = Gross Margin

The top line of the income statement shows total revenue that came from the sale of products or services. The top line is also called gross revenue sales or income. These sales represent all the money earned but not necessarily collected yet. Why is it called gross? Because on the top line no expenses have been deducted yet from the gross sales figure. You then deduct any product returns or sales discount. Cost of good sold represents a cost associated with making your product, this includes raw materials, labor and shipping. To manufacture the product the cost of goods sold is also referred to as a variable expense that means that the expenses vary depending on how much product you make. Remember income minus cost of good sold equals your gross margin. On the gross margin you deduct operating expenses which are different from cost of good sold. Operating expenses cannot be linked directly to the production of your product or service. Operating expenses as the cost operator business this can include marketing and advertising, salaries, rent, insurance and utilities. Depreciation is an annual expense that spreads the costs of equipment like copiers, printers and computers over a span of time. Operating expenses are known as fixed costs because you incur the expense whether or not you sell your product or service.

Gross Margin − Operating Expenses = Operating Income

At this point operating income is also known as earnings before interest and taxes EBIT, from here we account for interest income and interest expenses. Interest income is the money you make from savings and interest expense is the money you pay on loans. Finally the amount of income tax you owe to the federal state and local government is deducted and you arrive at the bottom line which is called net income or net profit or net earnings. Net income tells you how much the company actually earned or lost during the specified period. It is a result of subtracting all the expenses from your revenue since it’s the last line of the income statement, net income is also referred to as the bottom line.

Most income statements calculate earnings per share or EPS. This tells how much money shareholders would receive for each share of stock they own if the company distributed the net income. Stated in its most simple form the EPS equals total net income divided by the number of outstanding shares.

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