Your business and budget will benefit from an income statement. It’s a valuable tool for keeping track of your expenditures and determining how to distribute funds. Don’t worry if you’ve never created an income statement before. We’re here to help you understand all you need to know to get started on the right foot.

What Is the Purpose of an Income Statement?

An income statement, often known as a profit and loss statement (P&L), summarizes a small business’s costs and earnings for a given period. You’ll also keep track of expenses, losses, profits, and income for your small business.

What Is a Single-Step Income Statement, and How Does It Work?

An income statement with only two sections: costs and revenues, is a single-step income statement. Expenses include the following:

  • Costs of administration
  • Charges for interest
  • Selling

Revenues from Sales Include:

  • Investment income
  • consulting fees
  • Revenue from services

What Does an Income Statement Contain?

can find the following items on an income statement:

  • Cost of Goods Sold (COGS)
  • Revenue
  • Profits from operations
  • Operating Income
  • General and Administrative Services

Revenue

The first element of an income statement is revenue. It’s the amount of money your company makes in a specific reporting period.

You’ll keep track of two types of revenue:

  • operational
  • and non-operating.

Operating revenue is the revenue generated by your company’s core business. Non-operating revenue, on the other hand, is money generated as a result of your company’s secondary operations.

The Following Items Are in Non-Operating Revenue:

  • Depreciation of assets
  • Income from dividends
  • Gains or losses in foreign exchange
  • Earnings from interest
  • Investment profits and losses
  • Rental revenue from a building

Cost of Goods Sold

The second element of an income statement is the cost of goods sold (COGS). It is the total cost of producing and selling a thing. COGS will be a line item on your income statement.

COGS is advantageous since it determines how much of a product will be profitable. You should expect a drop in net income as COGS rises.

To speed up the COGS process, organize your inventory in one of three ways:

  • Using the Average Cost Method (average product cost over time, regardless of the date of purchase)
  • FIFO (First In, First Out) is a (First in, First Out; the earliest arriving products will sell first, at the lowest price)
  • LIFO (last-in-first-out) (Last in, First Out; the latest arriving products will sell first, at the highest price)
  • May use COGS to calculate your company’s gross profit.

Profit Before Taxes

The third section of an income statement is gross profit. It’s a formula that allows you to calculate your company’s earnings without considering other costs.

Gross profit = subtracting total revenue from the cost of items sold (COGS)

The following items exclude from gross profit:

  • Depreciation
  • Interest
  • Taxes
  • Amortization
  • Debts

General and Administrative

General and administrative (G&A) expenditures are costs associated with running a firm. These costs aren’t limited to a single aspect of a company. Instead, they’ll take care of everything that keeps your small business running.

The following are examples of G&A costs that you’ll want to mention in your income statement:

  • Fees for consultants
  • Insurance for office equipment, including furniture,
  • Depreciation
  • Utilities
  • Subscription
  • Rent
  • Supplies

You’ll put general and administrative (G&A) expenditures below the cost of products sold on an income statement (COGS).

Operating Profits

Operating income will assist you in determining how much of your revenue is profit. This figure is arrived at by deducting gross profit from operational expenditures. The following items are included in the operating costs:

  • Wages
  • Depreciation
  • Cost of goods sold (COGS)

You’ll put this underneath G&A costs on an income statement.

Expenses for Marketing

Advertising, marketing research, promotion, and public relations are examples of marketing costs that you’ll incur to advertise your company. Will deduct Marketing expenditures from your profit?

If done effectively, marketing costs should increase income. To achieve the best results, you may need to customize these costs to your industry.

An Income Statement Example

Your activities will be on the left side of the revenue statement, and the quantities will be on the right. The following are examples of what income statements could show:

  • The selling price of products (COGS)
  • Before-tax earnings
  • Expenses
  • Net earnings
  • Gross profit
  • Sales or revenue
  • Taxes

What Is the Difference Between an Income Statement and A Balance Sheet?

In essential respects, balance sheets and income statements differ. A company’s balance sheet shows:

  • Assets
  • Liabilities
  • Equity held by shareholders

A company’s income statements show:

  • Sales (net) (revenue)
  • Selling, general, and administrative expenditures include
  • the cost of goods sold.
  • Profits from operations
  • Interest income (net)
  • Profit after taxes

You can see what you own (as assets), owe (as liabilities), and have in equity on your balance sheet. Because balance sheets monitor money made and spent, this is useful for present and future expenditures.

Assets, liabilities, and shareholder equity are not shown on income statements. On the other hand, income statements concentrate on a company’s costs and revenue to assess its profitability.

You have a comprehensive picture of your company’s profitability that can aid in determining its long-term survival.

Collaborate with Experts

One of the essential methods to keep track of your finances is to use an income statement. Work with a professional to ensure that your bookkeeping services requirements are met.

You can hire virtual bookkeeping Services or virtual accounting services that way. You can get the professionals at a lower cost than the local bookkeepers in San Diego or Accountants in San Diego.