statement, otherwise known as a profit and loss statement, is a summary
of a company’s profit or loss during any one given period of
time, such as a month, a quarter, or one year. The income statement
records all revenues for a business during this given period, as well
as the operating expenses for the business.
What an Income Statement is Used For
You use an income statement
to track revenues and expenses so that you can determine the operating
performance of your business over a period of time. Small business
owners use these statements to find out what areas of their business
are over budget or under budget. Specific items that are causing unexpected
expenditures can be pinpointed, such as phone, fax, mail, or supply
expenses. Income statements can also track dramatic increases in product
returns or cost of goods sold as a percentage of sales. They also
can be used to determine income tax liability.
It is very important to
format an income statement so that it is appropriate to the business
Income statements, along
with balance sheets, are the most basic elements required by potential
lenders, such as banks, investors, and vendors. They will use the
financial reporting contained therein to determine credit limits.
figures represent the amount of revenue generated by the business.
The amount recorded here is the total sales, less any product returns
or sales discounts.
- Cost of Goods
Sold represents the costs directly associated with making
or acquiring your products. Costs include materials purchased from
outside suppliers used in the manufacture of your product, as well
as any internal expenses directly expended in the manufacturing
- Gross profit is
derived by subtracting the cost of goods sold from net sales.
It does not include any operating expenses or income taxes.
- Operating Expenses
are the daily expenses incurred in the operation of your business.
In this sample, they are divided into two categories: selling, and
general and administrative expenses.
- Sales salaries are
the salaries plus bonuses and commissions paid to your sales
- Collateral and promotions
fees are expenses incurred in the creation or purchase of printed
sales materials used by your sales staff in marketing and selling
your product. Promotion fees include any product samples and
giveaways used to promote or sell your product.
- Advertising represents
all costs involved in creating and placing print or multi-media
- Other sales costs
include any other costs associated with selling your product.
They may include travel, client meals, sales meetings, or equipment
rental for presentations, copying, or miscellaneous printing
- Office salaries
are the salaries of full- and part-time office personnel.
- Rent is the fee
incurred to rent or lease office or industrial space.
- Utilities include
costs for heating, air conditioning, electricity, phone equipment
rental, and phone usage used in connection with your business.
- Depreciation is
an annual expense that takes into account the loss in value
of equipment used in your business. Examples of equipment that
may be subject to depreciation includes copiers, computers,
printers, and fax machines.
- Other overhead costs
are expense items that do not fall into other categories or
cannot be clearly associated with a particular product or function.
These types of expenses may include insurance, office supplies,
or cleaning services.
- Total Expenses
is a tabulation of all expenses incurred in running your business,
exclusive of taxes or interest expense on interest income, if any.
- Net Income Before
represents the amount of income earned by a business prior to paying
income taxes. This figure is arrived at by subtracting total operating
expenses from gross profit.
are the amount of income taxes you owe to the federal government
and, if applicable, state and local government taxes.
- Net income
is the amount of money the business has earned after paying income