The Income Statement
Today I am going to walk you through the basics of an income statement. Over the next couple of weeks, I will do the same with the balance sheet and statement of cash flows. By the end of May, they will no longer look like a foreign language.
Often referred to as the profit & loss statement, the income statement provides an accounting of your income and expenses over a stated period. That period can be a week, a month, a year. Whatever, suits your needs at the time of reporting.
The income statement starts at zero at the beginning of every year and measures the annual yield. It is a reporting of every cash-in and cash-out transaction that occurs. At the end of each year, net income is added to retained earnings on the balance sheet.
Using an income statement from Kat’s K9 Training, let’s dissect the basic equations contained within an income statement.
Calculating Gross Profit
Gross profit is determined using the following equation: Gross Profit= Revenue-Cost of Goods Sold
Gross profit is the profit remaining after paying the cost of the goods directly required for production but before paying for your overhead and general expenses.
Calculating Net Income
Net Income is determined using the following equation: Net Income = Gross Profit – General Expenses
General expenses include all expenses that are incurred to operate a business. They are not a direct result of producing your product or service. These expenses are necessary and would be incurred even if you had no sales.
The Bottom Line
This example is very basic. More detailed formats include depreciation. Others break the report into subcategories like other income, operating expenses, interest, and taxes. Just remember that ALL revenues and ALL expenses are used to determine the bottom line, or net operating income.
The big three reports are intricately linked. Errors on one report will trickle down to another, creating a distorted view of your financial situation. Therefore, correct entry and classification of every transaction is vital to preparing a useful income statement.
If you have questions regarding this report or classification of transactions, please consult a professional. They can provide training or accuracy checks so you can have confidence in the data being presented.
Not ready to contact a professional yet? Request The Bookkeeper’s Checklist today. This free resources outlines steps you can take every month to improve the accuracy of your reports.
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Owner, M & N Auto Sales and Service