Back to Basics: Income Statement
An income statement, also called a profit and loss statement, shows all your revenue streams and expenses over time so you can calculate your net income. It shows how much money your company will make after all your expenses are accounted for.
Unlike balance sheets, which give a snapshot of your business at any given time, your income statement shows what’s happening within your company over time.
Your income statement can cover any period, but statements that cover longer periods, such as a quarter or year, allow you to see fluctuations in your income and expenses. This helps you determine in which areas you’re over-budget or under-budget.
Revenue & Cost of Goods Sold
The first two sections of your income statement relate directly to your products or services.
In the revenue section, you’ll record your gross sales. You’ll subtract any returns and allowances granted due to broken or incorrect merchandise.
Under the costs of goods sold (COGS) section, you’ll record expenses directly related to manufacturing your product, including materials, inventory, direct labor costs, and shipping costs. If you sell services, these expenses could include your sales staff’s commission and fuel expenses.
Your gross profit measures how efficiently your company uses labor and supplies.
Your gross profit can be used to calculate your gross profit margin, which is useful for comparing your efficiency over time and for comparing your efficiency to other companies in your industry.
The expenses section will include all overhead and labor expenses not directly related to selling your products or services. These expenses include rent, utilities, wages, and depreciation of assets.
Earnings Before Interest & Tax
Your earnings before interest and tax (EBIT), or operating profit, represent your company’s earning power from its core business operations. It indicates your potential profitability.
Your net income is your company’s total profit, after subtracting all expenses, interest payments, and taxes from your revenue. It measures how profitable your company was over the specified period.