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Income Statement Definition
An income statement, often called a profit and loss (P&L) statement, shows a company’s profit or loss over a certain period of time. It is considered to be one of the main financial statements used to analyze the financial health of a company. These include:
The income statement doesn’t paint a complete picture of a company’s financial situation, but it provides a lot of very important information.
If you are keeping track of your company’s income statement yourself, we recommend using specialized accounting software. Check out our guide to the Best Accounting Software for Small Businesses to find the best option for you.
What’s on an Income Statement?
An income statement has two main sections: revenue and expenses. These are used to calculate a company’s profit or loss.
Revenue is the money a company makes from selling goods or services as well as from other potential sources. It is often referred to as a business’s “top line.”
Different types of revenue include:
- Operating revenue - Money made from a company’s primary business activities, such as from selling goods or services.
- Non-operating revenue - Money made from activities outside of a company’s primary business activities, such as from interest-earning accounts or rental income from unused property the company owns.
- Gains - Money gained from non-recurring events, such as payments from a lawsuit or the sale of long-term investments or assets.
Expenses are money flowing out of a company. Expenses can be broken down into different categories, including:
- Operating expenses - Expenses related to a company’s normal business activities, such as payroll, rent, utilities, advertising, and production costs. These generally make up the majority of a company’s total expenses.
- Non-operating expenses - Expenses not related to a company’s day-to-day operations, such as interest expenses on a loan.
- Losses - One-time expenses, such as lawsuits or losses on the sale of investments.
Profit or Loss
Also known as a company’s “bottom line,” the net profit or loss is the result once a business subtracts its expenses from its revenue. A positive number is a net profit, while a negative number is a net loss.
Income Statement Formulas
There are a few different formulas that business owners, investors, and analysts use when examining a business’s income statement. Each one of these provides a slightly different look at a company’s financials. They include:
- Gross profit = revenue - cost of goods sales (COGS)
- Operating profit (earnings before interest & tax (EBIT)) = sales - COGS - operating expenses
- Net profit = revenue - all expenses
Why Is the Income Statement Important?
The income statement is important because it shows how profitable a business is during a specific time period. This is useful information to business owners, investors, analysts, and bankers.
If a business can demonstrate that it is profitable, it is more likely to receive investments and lines of credit if needed. Additionally, breaking down a business’s revenue and expenses into specific categories can help business owners identify different opportunities to increase revenue, lower expenses, or even both.
Income Statement vs. Balance Sheet
The income statement and the balance sheet provide different pieces of financial information about a company from different perspectives.
A balance sheet provides a snapshot of a company’s financials at a specific point in time. It shows the total amount of assets and liabilities that a business has accumulated over the entirety of its existence.
An income statement shows the profitability of a business over a period of time. It shows how much money a company has earned and how much it has spent over that period, whether it be for a month, a quarter, or a year.
Neither of these financial statements provide a complete picture of a business’s financial health, but they each play an important role in analyzing a company.
What Is an Income Statement Frequently Asked Questions
What do you put on an income statement?
An income statement includes a company’s revenue, expenses, and profit or loss for a specific period of time.
How do you prepare an income statement?
You can create an income statement with specialized accounting software.
What is the most important part of an income statement?
The most important part of an income statement is the net income or loss, also sometimes called a company’s “bottom line.”
Are accounts receivable on the income statement?
No, accounts receivable are not recorded on an income statement. However, accounts receivable are included on a company’s balance sheet.
What is the difference between an income statement and a profit and loss statement?
There is no difference between an income statement and a profit and loss statement. They are two different names for the same thing.
What is the top line on an income statement?
The “top line” is a common term for a company’s revenue.
What is the bottom line on an income statement?
The “bottom line” is a common term for a company’s net income or loss.