- Income statements should provide a holistic view of the financial health of a business, including income, expenses, losses, and profits.
- Income statements are necessary for both internal decision-making and external transactions, such as securing funding.
- Proper preparation of an income statement is essential to ensure that the report reflects an accurate picture of the financial situation of the company.
- This article is for small business owners and professionals who want to learn how to properly write an income statement for a business.
Preparing an income statement involves making a list of income, expenses, losses and gains. Once these items are consolidated, they are organized into categories and added together to calculate net income over the period covered by the statement.
When compiling an income statement, it is important to make sure that the right items and categories are included. Otherwise, business owners cannot get a clear picture of the financial health of a business, department, or industry for the period in question.
Several elements deserve special attention when preparing an income statement. Different companies handle these items differently, and the way they are handled will have a significant impact on the information taken from an income statement:
If these elements sound familiar to you, it’s because they are often singled out for reintegration into net sales. The resulting figure is called Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) and is often considered a more accurate representation of a company’s profitability than its bottom line.
What is an income statement?
An income statement is a financial report that shows all the income and expenses of a business, department, team, or operation over a defined period of time. Reports are easily prepared using most accounting software, allowing users to select specific items to include or exclude based on customer, payee, category, or various tags.
In addition to showing income and expenses by category, the income statements also include the net income (income minus expenses) of the organization over a period of time.
Most accounting software also allows users to select the types of income and expenses to include. This allows managers to customize reports to get the most accurate and relevant view of their business finances.
To remember : Income statements are reports used to show all of a business’s income and expenses.
When and why are income statements used?
The income statements are regularly used by company directors for reporting purposes. And, depending on the circumstances of a business or business owner, they can also be used for other purposes, such as valuing a business or reviewing potential tax strategies.
Here are other use cases for income statements:
- Review of the company’s financial statements
- Make management decisions, such as hiring
- Consider investing in new assets
While there are many cases where tax returns can be extremely helpful, there are also cases where people think they are used, but they are not really.
Most notably, when filing taxes, tax returns are not really necessary. They can be used by business owners or executives to get an overview of how much they may owe, but tax returns are prepared using custom forms rather than categorized tax returns. These deposits should be verified using third-party documents such as bank statements.
[Related Article: Small Business Deduction Checklist]
So, when preparing tax returns, accountants usually look directly at account statements, rather than internal accounting reports like income statements.
Advice: When filing taxes, tax returns are generally not used.
How to write an income statement
Income statements can be customized to meet the specific needs of a business, team, department or manager. Having said that, there is a general process of organizing income and expenses that should be followed when preparing an income statement. Otherwise, managers cannot be sure that they are compiling the right records in the right format to provide information about an organization’s profitability.
The four stages of drafting an income statement are:
- Identify sources of income, as well as gains (from investments, for example)
- Identify the expenses and losses of the business incurred during the same period
- Consolidate income, expenses, gains and losses by category, beneficiary or other factor
- Add up the income, expenses, gains and losses to determine the net income of the business for the period covered
Preparing an income statement is much easier with accounting software. Most standard accounting software allows users to easily generate income statements by simply selecting the type of accounting report they want to create and then identifying the income and expense categories they want to include or exclude from their report. report.
[Related Read: Learn How to Create an Invoice]
What is included in an income statement?
An income statement includes all instances of money entering or leaving a business (income and expenditure), as well as cases where the business makes or loses money without the money changing hands (such as the value of the company’s assets rising or falling). Essentially, an income statement includes all of the items that, when added together, equate to the net income of a business over a defined period of time.
Included in an income statement:
- Revenue by category
- Expenses by category
- Company gains on asset value
- Losses incurred during the same period
From these, managers can use accounting software to calculate net income for the period covered, which is also shown on the statement. Statements can also include intermittent totals at different times (operating income, pre-tax income, etc.). Statements can also include net income as a percentage of gross income (profit margin).
Example of income statement
As seen in the example above, income statements begin by naming the company, team, or department covered by the statement, as well as the period covered by the statement.
The income statements then list the organization’s income for the period covered, as well as its expenses. Then there is a total operating result for the period. Non-operating income is then added, along with gains and losses and interest charges.
Once these items are added, managers can see the company’s pre-tax income. Then there is a line for the tax expense, before finally arriving at the bottom line. This total represents the money earned or lost during the period covered by the statement.
While many income statements list totals for each of the included items, some items can also be broken down in more detail (income can be broken down by industry, for example) if this provides valuable information to managers.
Income statement template
Free download: Create an income statement in minutes using our free income statement template.
This income statement template can be useful for those looking to create a report manually. But if you are using accounting software for your business, you probably won’t need it. Instead, you should be able to open your accounting software and generate a custom report that includes the items you want to include in your calculations to determine net income for the period under review.