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Income Statement: Definition, Analysis and How to Create One
By Colin Higginbotham, TD In-Store Small Business Lead
Monté Foster, TD SVP, Retail and Small Business Banking
What is an income statement?
An income statement (also known as a profit and loss or P&L statement) documents a business' revenue and expenses. Along with a balance sheet, cash flow statement and statement of owner's equity, it's one of the four major financial statements that a business uses to track overall financial health. The income statement tracks the efficiency of a business and can serve as a comparative document to peers and competitors.
Why should you create an income statement?
The income statement is an important tool to showcase the overall profit and loss of a company during a specific period of reporting. It effectively conveys profitability and can be used by company management to indicate areas of strength and weakness and help them better understand where their business stands financially. Do they have money left over to reinvest or make additional purchases, or do they need to cut back spending in certain areas to help offset losses? The income statement can also be used to make key changes to the company's financial structure in order to adapt to expanding competition and the ever-changing financial landscape. Potential investors in a business may also use it to ascertain the general viability of that business.
How is an income statement structured?
All income statements are structured around total net income, which is found by simply subtracting costs (expenses and losses) from income (revenue and gains) to determine profit (income is more than costs) or net losses (income is less than costs). Income statements are structured as either single-step statements or multi-step statements.
- Single-step statements provide a streamlined and simplified view of a company's total net income and are often used by small businesses. The key aspect here is bottom line net income—as shown in the example below
- Multi-step statements provide a more comprehensive view of the company's total income. Preferred by larger companies, these statements will capture each contributing item in detail as sub-bullets within the categories of expenses, losses, revenue and gains, including total operational or non-operational costs.
Single-step income statement examples
|
Profitable Company |
Loss Generating Company |
|
|---|---|---|
|
Revenue (from sales) |
$80,000 |
$80,000 |
|
Gains (from investments) |
$20,000 |
$20,000 |
|
Total Income |
$100,00 |
$100,00 |
|
Expenses (salaries, inventory, rent, vehicle) |
$65,000 |
$70,000 |
|
Losses (interest costs, depreciation) |
$10,000 |
$50,000 |
|
Total Costs |
$75,000 |
$120,000 |
|
Total Profit |
$25,000 |
-$20,000 |
Setting up your income statement
The heading of an income statement will include the business name and the period of time that it will cover. The heading may indicate the fiscal year or specific quarter being reported. Here are two examples:
Main Street Auto Sales LLC
Income Statement
For the fiscal year 2020
Or:
Main Street Auto Sales LLC
Income Statement
For the fiscal quarter ending April 30, 2021
Now that you have your heading, create your income statement with these four main parts: revenue, gains or profits, expenses and losses. Go to Microsoft Office to download a free income statement template†
The four components of an income statement
Unlike the balance sheet that can change on a daily basis, the income statement captures data over a specific period of time. The four key components of an income statement are:
- Revenues and gains – for total income
- Expenses and losses – for total costs
1. What is revenue in a business income statement?
Revenue, or gross sales, is the total income generated from the sale of a business' goods or services. There are two primary types of revenue: operating and non-operating.
- Operating revenue is gained through direct sales of goods or services
- Non-operating revenue is gained through secondary means such as through advertisement contracts, investments or bank interest
Though businesses may arrange their income statements in accordance with their individual accounting methods, all income statements will incorporate documented revenue.
2. What are gains or profits in a business income statement?
Gains, or profits, are any other forms of income sources, usually from asset sales such as equipment or real estate. For example, a piece of equipment that is more valuable now than when it was purchased would be considered a business gain. Gains are usually separated into two types: realized and unrealized gains.
- Realized gains are profits made upon the sale of a particular asset
- Unrealized gains are profits accrued while the asset is still owned by that business
3. What are expenses in a business income statement?
Expenses are any costs associated with continued business operations. Expenses are separated into two types: primary and secondary expenses.
- Primary expenses are accrued during normal day-to-day operating procedures, including employee salaries, store or office space rent costs, inventory costs, equipment or materials, utilities, shipping charges, and depreciation.
- Secondary expenses usually pertain to lending and banking charges, i.e. loan interest or losses on any asset or equipment sales
4. What are losses in a business income statement?
Losses are any decrease in business assets. These depreciations are usually one-time occurrences. The most common examples of a business loss are: decrease in equipment value, excess income or overtime, discretionary costs, unexpected emergences, or lawsuits. If the total amount of expenses in a given time period are greater than the total revenue during that same period, this would be defined as a net loss.
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