What is an Income Statement?

Meaning of Income Statement

The income statement is a company’s one of the most important financial statement that indicates profit and loss for a fiscal year. This profit or loss is evaluated by adding all revenues and then subtracting the expenses from operating and non-operating activities.

Corporate finance and accounting use the income statement as one of the significant financial statements. This income statement includes gross profit, revenue, costs, taxes paid, net profit, selling and administrative expenses, other expenses, and income, etc.

This income statement is used as a great base to start a financial report because most of the information is available in this statement.

Components of an Income Statement

Most of the companies have similar components, however, due to the company’s expense, income and operation type of operations, there are few variations.

The most basic income statement components are:

  • Revenue/Sales – At the top of the statement every firm’s sales and service revenue are shown.
  • Cost of Goods Sold (COGS) – It is a line-item that sums up the direct costs related to goods sold to make revenue. If the company is a service business, COGS is also known as the cost of sales. A few examples are materials, parts, labor, and the allocation of other expenses such as depreciation.
  • Gross Profit – It is determined by subtracting the cost of goods sold from sales revenue.
  • Marketing, Promotion, and Advertising Expenses – Most organizations have expenses associated with selling products and services. Marketing, promotion, and advertising are often classified in the same cost.
  • Depreciation & Amortization Expense – These are non-cash charges. A few examples are plant, property, and equipment (PP&E).
  • Interest – It is divided into interest income and interest expense line in the income statement.

Also Check: Types of Financial Statements

Income Statement Format

Company ABC’s Annual Income Statement
Revenue

Operating Expenses

Salaries

Rent

Amortization

Depreciation

xxx

xxx

xxx

xxx

xxx

xxx

Operating Income xxx
Interest Expense

Tax

xxx

xxx

Net Income xxx

Income Statement Formula

Income Statement Formula

Income Statement Example

Here is an income statement from Amit’s adjusted trial balance for the year-end December 2015.

Amit Keyboard Shop’s Annual Income Statement For the Year-End December 2015
Revenue
Merchandise Sale

Music Lesson Income

20,000

5,000

Total Revenue 25,000
Expenses
Cost of Goods Sold

Depreciation Expense

Wage Expense

Rent Expense

Interest Expense

Supplies Expense

Utility Expense

5,000

2,000

500

400

400

400

300

Total Expense 9,000
Net Income 16,000