What is an income statement and how to make one (2024)

An income statement is a financial statement that shows your revenue after expenses for a particular period, such as a month, quarter, or year. Preparing one is simple if you stay on top of your company's bookkeeping.

What is an income statement and how to make one (1)

What is an income statement?

An income statement is one of the four primary financial statements. The other primary financial statements are the balance sheet, the statement of cash flows, and the statement of shareholder's equity.

The income statement may be known by other names, including the profit and loss statement or the statement of earnings. No matter the name, it's a measure of your company's performance.

You can use an income statement to:

  • Estimate what you'll owe at tax time
  • Identify expenses to cut
  • Stay on top of the cost of generating sales
  • Assess the sustainability of the business
  • Plan for and forecast revenues and expenses

How to prepare an income statement

The income statement includes several key pieces of information necessary to calculate your business's profits and losses. The following steps will help you prepare an income statement for your business.

1. Print the trial balance

Access your accounting software and print a trial balance for the period’s end and print a trial balance for the period end. The trial balance is a summary report that contains ending balances for every account in the general ledger.

2. Determine your total revenue or sales

Your trial balance may include one or more revenue or sales accounts. Add up all the revenue line items on the trial balance and enter the total on the revenue line item of your income statement.

3. Determine your cost of goods sold

Cost of goods sold (COGS) consists of all of the direct costs associated with producing your business's goods or services. These costs typically include direct labor, direct materials, freight, storage, packaging, and factory overhead.

Add up all the cost of goods sold line items on your trial balance and enter the total into the cost of goods sold line on your income statement directly under the revenue line.

4. Calculate your gross profit

Gross profit is the amount of income left over after subtracting COGS but before subtracting operating expenses. Subtract your COGS from the revenue figure and enter the result as your gross profit.

5. Determine your operating expenses

Operating expenses are the expenses (other than COGS) your business incurs to keep it running, such as wages, rent, office supplies, and more. Operating expenses might be lumped into one section along with cost of goods sold if you use a single-step income statement. However, most businesses use the multi-step income statement format, which shows operating expenses broken out into multiple line items for different types of expenses. You may want to group certain operating expenses on one line for simplicity's sake. For example, your electric, gas, and sewer utility expense can be grouped as “Utilities." This keeps your income statement from becoming too unwieldy.

Enter each operating expense grouping on your income statement under the Operating Expenses subhead, with total operating expenses on a line beneath.

6. Calculate your net income or loss

Subtract your total operating expenses from your gross profit and enter the result on the final line of your income statement. You have net income if the total is a positive amount. You have a net loss if the result is a negative amount.

Income statement FAQs

If you're new to preparing an income statement, you may have a lot of questions about the process. Here are answers to some of the most frequently asked income statement questions.

What is a single-step income statement?

A single-step income statement lists all expenses, including cost of goods sold, in one column. This format may be acceptable for sole proprietors and very small businesses. However, most companies issue multi-step income statements, which break out cost of goods sold, gross profit, and operating expenses.

What Is Included in an Income Statement?

An income statement typically includes revenue or sales, cost of goods sold, gross profits, operating expenses, and net income or loss.

What is the basic format of an income statement?

The basic formula for an income statement is Revenues – Expenses = Net Income. This simple equation shows whether the company is profitable. If revenues are greater than expenses, the business is profitable. If expenses are greater than revenues, the company is operating at a loss and needs to generate more revenues or reduce expenses.

What's the easiest way to prepare an income statement?

Thanks to modern accounting software, the days of keeping track of revenues and expenses in a physical ledger and manually creating an income statement are over. These days, businesses have many affordable options for cloud-based accounting software that can record all transactions and generate a balance sheet, income statement, and statement of cash flows within minutes.

Your income statement must be accurate to be useful for assessing your business's performance and making decisions. If you need help with bookkeeping and preparing financial statements, it's a good idea to work with a professional.

Find out more about Business Accounting

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What is an income statement and how to make one (2024)

FAQs

What is an income statement and how to make one? ›

An income statement is a financial report detailing a company's income and expenses over a reporting period. It can also be referred to as a profit and loss (P&L) statement and is typically prepared quarterly or annually. Income statements depict a company's financial performance over a reporting period.

How do you create an income statement? ›

The following steps will help you prepare an income statement for your business.
  1. Print the trial balance. ...
  2. Determine your total revenue or sales. ...
  3. Determine your cost of goods sold. ...
  4. Calculate your gross profit. ...
  5. Determine your operating expenses. ...
  6. Calculate your net income or loss.
Jan 17, 2024

What is an income statement and how is it prepared? ›

The income statement focuses on the revenue, expenses, gains, and losses of a company during a particular period. An income statement provides valuable insights into a company's operations, the efficiency of its management, underperforming sectors, and its performance relative to industry peers.

What is income statement and examples? ›

An income statement is a financial statement that shows you the company's income and expenditures. It also shows whether a company is making profit or loss for a given period. The income statement, along with balance sheet and cash flow statement, helps you understand the financial health of your business.

What is a simple step income statement? ›

A single-step income statement presents the revenue, expenses and ultimately the profit or loss generated by a business, but it reports on this information by using just one equation to calculate profits. The equation used in a single-step income statement is: Net Income = (Revenues + Gains) – (Expenses + Losses)

How can I get an income statement? ›

via your agent ■ via myGov – income statement ■ your employer – payment summary.
  1. Through myGov.
  2. Through your employer.
  3. Using a registered tax agent.
  4. For more information.
  5. Income. Statement.

What is the format of income statement? ›

The income statement can be presented in a “one-step” or “two-step” format. In a “one-step” format, revenues and gains are grouped together, and expenses and losses are grouped together. These amounts are then totaled to show net income or loss.

What is the basic income statement? ›

The Income Statement is one of a company's core financial statements that shows their profit and loss over a period of time. The profit or loss is determined by taking all revenues and subtracting all expenses from both operating and non-operating activities.

What is an income statement template? ›

An income statement sets out your company income versus expenses, to help calculate profit. You'll sometimes see income statements called a profit and loss statement (P&L), statement of operations, or statement of earnings.

How to do an income statement in Excel? ›

How to make an income statement in Excel
  1. Prepare your Excel file. Open a new Excel file and prepare it to become an income statement. ...
  2. Determine the categories. ...
  3. Choose the subcategories. ...
  4. Input the categories and subcategories. ...
  5. Set up the formulas. ...
  6. Input the data. ...
  7. Consider additional formatting. ...
  8. Finalize the document.
Jun 24, 2022

What are the three 3 types of income statement? ›

The income statement, balance sheet, and statement of cash flows are required financial statements.

Does cash go on the income statement? ›

The income statement includes revenue, expenses, gains and losses, and the resulting net income or loss. An income statement does not include anything to do with cash flow, cash or non-cash sales.

What goes at the top of an income statement? ›

The layout of an income statement is simple to follow. Sales start at the top, expenses and other costs are subtracted as you go down the column and "the bottom line" tells you how much money your practice earned or lost at the end of the reporting period.

How to prepare a single income statement? ›

The single-step income statement is straight-forward. First, total revenues, then subtract expenses, and, finally, show Net Income.

What is the simple income statement formula? ›

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 is on the income statement in the single step? ›

A single-step income statement is a summary of a business's profitability that uses one calculation to arrive at net income before taxes—hence the single step. It groups all revenue together regardless of the source and does the same for expenses. It then subtracts expenses from revenue to determine net income.

How is an income statement laid out? ›

Single-step income statements include revenue, gains, expenses, and losses, and they strictly show operating costs. For single-step income statements, you need only one calculation: net income. To determine net income, you simply subtract all your expenses from total revenue.

How do I make proof of income statement? ›

How to Provide Proof of Income
  1. Annual Tax Return (Form 1040) This is the most credible and straightforward way to demonstrate your income over the last year since it's an official legal document recognized by the IRS. ...
  2. 1099 Forms. ...
  3. Bank Statements. ...
  4. Profit/Loss Statements. ...
  5. Self-Employed Pay Stubs.

References

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