What is an Income Statement?

What is an Income Statement?

A plumber in Hawaii just asked me this question. It’s surprising how many people, including self employed business owners, do not know the fundamentals of finance.

When you hear the term “income statement”, what is the first thing that comes into your mind? According to some researches, an income statement is a report that gives the management and public a better and apparent understanding of how the business is doing. In addition to this, income statement covers the financial performance in the same period. Apart from this, financial statement is also known as statement of expense and revenue, statement of earnings, operation statement and loss and profit statement.

4 Major Financial Statements

  • Statement of Cash Flows
  • Income Statement
  • Balance Sheet
  • Stockholders’ Equity

Income Statement is sometimes called Profit and Loss statement wherein it answers the fundamental questions when evaluating the performance of a certain business. Aside from this, the income statement reports the costs of selling the products, sales made, costs in providing the service, tax amount and other expenses incurred in running a business during a specific period. Most companies commonly issue income statement every quarter, year and month.

5 Major Areas of Income Statement

  • Sales- This refers to the money that a certain company makes in a form of selling the services or products within that specific period. This is the overall total of the revenue accounts of a business.
  • Costs of Sold Goods- This is usually found in the financial statement of merchandising companies but it can also be found in service based companies. This is the total amount spent within a specific period to manufacture or purchase products or provide services that were sold.
  • Gross Profit- This is known as the Revenues minus the Cost of Sold Goods. It simply means that you subtract the cost of the services or products from how much you should them for. This does not include the taxes or operating expenses. According to some finance books, it is sometimes referred to as EBITDA or also known as earnings before interest, taxes, depreciation and amortization.
  • Operating Expenses- This refer to the overall amount spent on expenses that were not directly related to the service or product. Other overhead expenses, interest on loans, advertising, marketing and salaries come into this category.
  • Net Income- This will allow the stakeholders to know whether a certain business or company made a loss or profit for a specific period. In order for you to get the net income, all you need to do is to subtract the operating expenses from the Gross Profit.

Why is it important to keep a personal one?

It is a fact that starting your very own business is considered as one of the most essential things that any person can do to take charge of his or her financial future. One of the top reasons why you need to keep a personal income statement is that it is one of the important things that your investors want to view. It is also true that no business will be able to obtain their startup funding without a solid income statement and business plan behind it.

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