An income statement, also known as a profit and loss statement or earnings statement, is a key financial statement used in business accounting that reveals a business’s revenue and expenses during a specified period. The purpose of an income statement is to show how revenue is transformed into net profit. While there are different ways to create an income statement, most include a few basic items, such as revenue generated for the specified period; and the expenses associated with generating the revenue (e.g. write-offs, taxes depreciation, etc.).
Normally, an income statement is broken down into two primary sections: the operating section and non-operating section. Here’s what to include in each:
For the operating section, you should begin by listing your business’s revenue for the specific period. This includes any money generated through your normal business practices, including accounts receivable. Typically, revenue is presented on an income statement as the sales minus sales discounts, returns and allowances. When a business sells a product or service, it generates revenue — and this revenue should be recorded in an income statement.
Expenses are another key item to include in your income statement. Any expense that’s associated with the revenue your business generates should be included here, assuming it occurred during the same specified time period. You can break it down even further, however, by including cost of goods sold (COGS), Selling, General and Administrative (SGA) expenses, depreciation, and research and development (RD) expenses.
The option section of an income statement is the non-operating section. For this section, you should include other revenue from methods which aren’t related to your primary business activities. This may include rent, income from patents, etc. Furthermore, the non-operating section should include unusual gains that are infrequent in your business’s line of work. Other items to include in the non-operating section of your income statement include finance cost (e.g. interest of bank loans), as well as income tax expense.
Hopefully, this gives you a better understanding of how to create an income statement for your business.
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