Also called a profit and loss statement (P&L), an income statement is a picture of your businessâ€™ revenues and expenses â€” and the resulting net profit and loss â€” over a certain period of time (usually a year).
The income statement is one of the three essential financial documents â€” along with a balance sheet and cash flow statement â€” that a public company must report on an annual basis. The income statement is also the only financial statement that the IRS requires, which the taxing agency uses to assess taxes on profits earned.
There is no standard format for an income statement, but most will include rows for items like revenue, tax expenses, profit or loss, and comprehensive income. An income statement is primarily meant to inform the reader about the ins and outs of the companyâ€™s financials, so the format you choose should clearly identify your expenses. You should have a distinct row for every separate cost, so this chart could get large if you are splitting up your expenses into many categories. You can categorize expenses by type, function or by some other system.
Income statements are useful in many ways. They can help you easily visualize your companyâ€™s year-over-year (YOY) and quarter-over-quarter (QOQ) performance. Two or three years of data is often included to enable comparison. Income statements can also be used to calculate various financial ratios, such as:
An income statement helps you understand which way your business is headed, which is useful for informed and strategic course correction.
The income statement is the only financial document that provides an overview of your companyâ€™s net profit and loss over a period of time. A balance sheet, meanwhile, is a snapshot of a companyâ€™s assets, liabilities, and shareholdersâ€™ equity at a particular point in time. It basically tells you what your company owns and what your company owes, including the amount of money that shareholders have invested in your company.
While an income statement allows you to understand the dynamics of the money flowing into and out of your business, a balance sheet gives you information to compute rates of return and evaluate your capital structure, which is the manner in which your company is financing its operations and growth.
An income statement is useful because it illustrates a companyâ€™s financial trajectory. A balance sheet, on the other hand, is useful because it shows how effectively a company is managing its resources.
There are a variety of confusing terms you may find on an income statement. Here are some common terms to know:
There is no single correct format for an income statement, so each business owner can choose one that best fits their needs. However, it can be much easier to start with a template that will allow you to plug in your information and create an attractive statement with ease. Here are four free income statement templates:
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