What are income statements? | Small business

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Income statements are those that a business keeps in its records, reports on its income statement, and uses to calculate its bottom line, or profit, at the end of each accounting period. An income statement can be income, gain, expense, or loss. Your small business may have multiple accounts in each category. Income and gains increase profit, while expenses and losses decrease profit.

Income and earnings

Revenue is the money a business earns through its business operations, such as selling its products and services to customers. Operating income is that which a business earns as part of its usual line of business, while non-operating income comes from other sources, such as interest income on investments. A gain is income that typically results from one-off transactions, such as selling equipment for more than its book value or winning a lawsuit.

Expenses and losses

Expenses are the costs that a business incurs to generate income. Salaries and cost of goods sold are examples of expenses for a small business. Expenses incurred in the normal line of business of a business are called operating expenses, while those incurred in secondary activities, such as paying income tax, are called non-operating expenses. Similar to a gain, a loss usually occurs in one-off transactions, such as selling an asset for less than its book value or losing inventory due to theft.

Account characteristics

Income statements are temporary accounts in the records of a company because they only hold a balance for a particular accounting period. A business closes each account at the end of each period and sets the balance to zero for the next period. For example, if your small business has $ 100,000 in its income account at the end of the quarter, you would report $ 100,000 in income to your income statement and set the balance to zero for the following quarter.

Accrual accounting

A business typically uses accrual accounting to record transactions. On the basis of accrual accounting, a business records income, expenses, gains and losses as they are earned or incurred, regardless of when the payment is made. For example, if your small business sells $ 1,000 in product in the current quarter and you expect your customer to pay in the next quarter, you will record $ 1,000 in revenue in the current quarter.

Calculation of net income or net loss

Net income or net loss equals income plus gains minus expenses minus losses. A positive result represents net income and means that income and gains are more than expenses and losses. A negative result represents a net loss. For example, if your small business has $ 100,000 in income, $ 10,000 in earnings, $ 70,000 in expenses, and $ 5,000 in losses, you would report $ 35,000 in net income: $ 100,000 plus $ 10,000 minus 70 $ 000 minus $ 5,000.


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