What Is an Income Statement? (Explanation and Examples)
An income statement shows business revenue minus expenses and losses. Your income statement, also called the “profit and loss” statement, goes hand in hand with your cash-flow statement and balance sheet to create a complete snapshot of your business’s financial performance.
Read on to dive further into the income statement definition and how it can provide valuable financial insight.
Income statement equation
The income statement equation used with a single-step format is relatively simple:
Net income = (total revenue + gains) – (total expenses + losses)
However, companies with complex lines of business may use a multistep income statement format, which requires different calculations.
Purpose of an income statement
The purpose of an income statement is to summarize revenue, gains, expenses and losses on a monthly, quarterly or yearly basis. The income statement shows the resulting net income your business earned during that period of time.
An income statement helps you analyze trends within your business, allowing you to forecast and plan for the future. Using an income statement, you can track the cost of sales during a certain period of time to determine if your expenses and prices are too high or too low.
In general, the information an income statement provides better prepares you to manage your business cash flow. It would also show the sustainability of your business, and whether or not you’re on track to generate steady revenue.
Note for corporations:
An income statement is one of the five financial statements that a corporation needs to annually report to the state where it is incorporated. Corporations may refer to the document as the “statement of income,” “statement of operations” or “statement of earnings.”
You’ll need to prepare your income statement alongside the corporation’s statement of comprehensive income, which uses information from the income statement, as well as its balance sheet, statement of cash flows and statement of stockholders’ equity.
Income statement example and template
You should be able to find income statement templates online, such as our downloadable template below. When searching for the right template to use, consider if you want a single-step or multistep income statement.
Single-step vs. multistep income statement
- Single-step income statement: This method is popular among sole proprietors and small operations with a single line of business. The single-step process follows this equation: Net income = (revenues + gains) – (expenses + losses).
- Multistep income statement: This type of statement is common for companies with multiple lines of business or those that sell tangible goods. The multistep process separates operating revenue and expenses from non-operating revenue and expenses. You would use three formulas throughout the income statement:
- Step 1: Gross profit = net sales – cost of goods sold
- Step 2: Operating income = gross profit – operating expenses
- Step 3: Net income = operating income + non-operating income
What goes on an income statement?
Generally, all income statements include revenue, gains, expenses, losses, from primary and secondary business activities. If the bottom line is negative, that would indicate your business has a net loss. In the example above, the final number is positive, showing that the company generated net income in that quarter.
Here’s a closer look at the key pieces of financial information you could include on your income statement:
- Costs of goods sold (COGS): Costs associated with selling, such as materials and labor needed to build and sell your product.
- Depreciation: The loss of value from assets that depreciate with age, such as equipment or vehicles.
- Expenditures: Money spent on goods or services needed to run the business. You’ll record expenditures at the time of purchase. For instance, if you bought a copier and paid for it in full, you’d consider it an expenditure.
- Expenses: Operating costs that are not directly related to your products or services. Expenses would include things like rent and utilities.
- Gains: Other income earned outside of core operations, such as money made through a sale of land or vehicles.
- Gross profit: Profit that the business earns after you subtract COGS from revenue.
- Net income: Money left over after you take into account all business expenses and costs. New businesses commonly have negative net income, or a loss.
- Non-operating revenue: Money earned outside of core business activities, such as business rental income or royalties from a partnership.
- Operating revenue: Money earned from selling goods or providing a service.
- Owner’s draw: Money withdrawn from the business to pay yourself.
The exact line items on your income statement would reflect your specific business. The steps and format would depend on the complexity of your operation. You could also change the date range to evaluate a specific month, quarter, year or another period of time.
Income statement vs. balance sheet and other financial statements
Businesses use income statements to examine financial results and identify operational issues that may affect net income. On the other hand, balance sheets primarily indicate whether or not the business has enough funds to meet upcoming obligations.
Other differences between an income statement and a balance sheet include:
An income statement complements the balance sheet and other standard financial statements. For instance, the cash flow statement shows how money moves in and out of your business and can act as a bridge between the income statement and the balance sheet.
One financial statement may show strengths in your business while another could show weaknesses. Regularly review and update all of your financial statements to keep a close eye on your operation.