What is an income statement?
5 min read
June 08, 2021 • Block Advisors
What is one of the best ways to gain insight on profitability, decision making, and change implementation for your small business? The answer – an income statement. Learn more about what an income statement is, why it serves as a key tool in a small business owner’s toolkit—and why banks might be interested in reviewing your income statement for a loan in this post.
Income statement definition
First, let’s start with an income statement definition. It’s a financial document that reveals how your business is doing from a financial standpoint over a specific reporting period.
Income statement example
Below is an income statement example created by Block Advisors. There is no difference between an income statement and a P&L. (See: What is a P&L Statement?) The two are synonymous. You can use this as an income statement template, and do the calculations behind the scenes.
We get that small business owners may not have the time to crunch those numbers. Thankfully, Block Advisors can help lighten your load. As part of your annual tax prep, we can create an income summary for your business, so you can get the business insights you need and continue to focus on what you love.
What does an income statement show?
Wondering, “what does an income statement show?” Essentially, it shows your net income by subtracting your losses and expenses from all revenue and gains. You can also use it to find out what areas of your business are under or over budget.
It’s also referred to as a profit and loss statement or net income statement; and it supports other financial documents like balance sheets, cash flow statements, and a statement of earnings.
You’ll find both single- and multiple-step income statements. With a single-step income statement, you subtract your total expenses from your total revenue to arrive at your net profit. With multiple-step income statements, it’s a little more involved. We’ll cover that next.
What goes on an income statement?
Multiple-step income statements include multiple calculations (hence the name) and require a lot more detail. Curious about what goes on an income statement? Here are the elements for the multiple-step income method.
- Revenues/sales: This is displayed at the top of the document – if you have multiple revenue streams, you add them together to create the total revenue line.
- Cost of goods sold (COGS): This figure is how much it costs to produce the goods and services sold to your customers during the measurement period. It generally includes raw materials and labor directly tied to the production of goods.
- Gross profit: Shown from subtracting COGS from total revenue.
- Operating expenses: These are expenses generated by a company’s core business activities. This includes the cost of salaries, fulfillment, marketing, technology, administrative costs, and other operating costs. Add the operating expenses together to come to a total operating cost amount.
- Interest expenses: If your business owes money, it likely will incur interest payments. Factor this amount in your income statement.
- Other non-operating expenses: These are expenses that are not from your business’ core activities, like interest.
- Depreciation: This is when you spread the cost of a long-term asset over its lifespan.
- Totals of the earnings before and after tax.
- The final line item is net earnings or profit. This number is arrived at by subtracting all expenses from the total revenues and gains after tax.
What is the purpose of an income statement?
Some small business owners may be new to income statements and may wonder why they’d want to take the time to create one. So, what is the purpose of an income statement? It’s often produced when an external stakeholder – like a bank, creditor, or investor – requests it. Or it can be created each year to give a year-over-year glance at a business.
You can produce an income statement for any period of time – whether it’s by month, quarter, or year.
While small businesses are not required to complete an income statement, it’s can be wise to have one – even if your business is a small enterprise. This is because it offers a good snapshot of your business’ financial health.
Again, don’t shy away from creating an income statement if numbers aren’t your thing. That’s why we’re here. A Block Advisors small business certified tax pro can create an income summary for you as part of your tax prep, which is a good start to your income statement.
Why is an income statement important?
There are a number of reasons it’s a good idea to create an income statement for your business:
- You can use it to give potential investors a glimpse of your business’s profitability.
- You can use it for financial projections.
- You can use it to help you as you complete other financial documents and even as you prepare your taxes.
- You can give it to creditors so they can gain insight into the financial health of your business.
- Your internal stakeholders also will find value in this document, as it can help inform future business decisions.
- You can use it to evaluate and create budgets.
- You can use it as part of the application process for various small business loans or credits.
Help with preparing income statements
Whether you need help filing small business tax forms or are looking for personalized guidance, we’re here for you. Block Advisors is dedicated to meeting the tax, bookkeeping services, and payroll needs of the self-employed and small business owners.