A profit and loss statement is a vital financial document that offers deep and valuable insights into a company’s profitability and financial performance over a particular period.
So, keeping this in mind, let’s explore all about income statements in terms of what an income statement is, its structure, and many more things in detail.
What is an Income Statement?
It is a financial document that indicates how much money a company earns and how much it spends over a period of time, like a quarter or a year. In simple words, it’s like a report card for a business’s financial health. Mainly income statement is categorized into three parts. They are: –
- Revenue: This is the total amount of money the business earns from various work, like sales and other activities.
- Expenses: These are the costs the company incurs to run its overall operations. However, these expenses include things like salaries, rent, and supplies.
- Profit (or Loss): By subtracting expenses from Revenue, the income statement calculates the company’s profit. If the result is a positive number, it’s called profit. If it’s negative, it’s a loss.
People use an income sheet to understand how well a company is doing financially. Investors look at them to decide whether to invest, and company leaders use them to make important business decisions to become successful.
Income statement Formula
If you want to find the net income, then you have to apply the below formula:
Net income= (Revenue- Expenses) + Gains- Losses
Gross Profit= Revenues- Cost of Goods Sold
Operating Income= Gross Profit- Operating Expenses
Income Statement Format
The main aim of revenue statement is to record the gains, losses, revenues, and total expenses of the company.
| Particulars | Amount | Amount |
| (A) Net Sales | – | |
| (B) Cost of Goods Sold | (-) | |
| (C) Gross Profit (A-B) | – | |
| (D) Operating Expenses (Salary, rent, commission insurance, etc.) | (-) | |
| (E) Net Income from Operations (C-D) | – | |
| (F) Other Income (Commission, interest received, rent received, etc.) | – | |
| (G) Other Expenses | (-) | |
| (H) Earnings Before Income Tax (E+F-G) | – | |
| (I) Income Tax | (-) | |
| (J) Net Profit / Net Income (H-I) | – |
This format has focused on various metrics. So, let’s learn about all those metrics in detail.
1. Revenue
The revenue statement begins with Revenue, representing the company’s total Revenue or sales. Revenue includes all the money the business earns through its core business activities like product sales, service fees, or other operating activities.
2. Cost of Goods Sold (COGS)
Next comes the cost of goods sold (COGS). COGS consists of all the costs directly associated with producing or purchasing the goods or services sold during the period. This can include manufacturing costs, raw materials, and labor.
3. Gross Profit
If you subtract the cost of goods sold from the total Revenue, it gives the gross profit. However, gross profit represents the amount of money the company has left after covering the direct costs of producing its goods or services. It’s a key indicator of the company’s operational efficiency.
4. Operating Expense
After calculating the gross profit, operating expenses are subtracted. These operating expenses encompass varied costs incurred in running the day-to-day operations of the business. This category includes marketing expenses, salaries, rent, utilities, and office supplies.
5. Operating Income
By subtracting operating expenses from gross profit, you get the operating income. Operating income reflects the company’s profit from its core business operations before considering interest and taxes.
6. Other Income and Expenses
Sometimes, companies have additional sources of income or expenses outside their regular operations. These could include interest income, investment gains, or extraordinary expenses. These items are listed separately to provide a clear picture of the company’s financial health.
7. Net Income
The final section of the income statement calculates the net income. Net income is the company’s total earnings after deducting all expenses, including operating expenses, interest, taxes, and other extraordinary items. It represents the bottom line, indicating how much profit the company has made during the specified period.
Who Uses an Income Statement?
There are mainly two types of individuals who use an income statement. They are internal and external.
- Internal users
They include business management and a board of directors who take the help of income statements to analyze where the business is standing. On top of that, internal users also use this statement to make informed decisions for the company’s betterment.
- External users
They comprise various people linked to the company, like creditors, competitors, investors, etc. That means investors use this statement to check the position of the business in terms of growth so that they can easily decide whether to invest in the future.
Additionally, creditors use it to check if the company has enough cash flow to pay their debts and take new loan amounts. On the other hand, competitors check income statements to know the details of the success parameters of the company.
How to read an Income Statement?
XYZ Company Revenue Statement
For the Year Ended December 31, 2023
(in thousands)
Revenue: Rupees 500,000
Cost of Goods Sold (COGS): Rupees 250,000
Gross Profit: Rupees 250,000
Operating Expenses:
– Selling and Marketing: Rupees 80,000
– Research and Development: Rupees 40,000
– General and Administrative: Rupees 60,000
Total Operating Expenses: Rupees 180,000
Operating Income: Rupees 70,000
Non-Operating Items:
– Interest Income: Rupees 5,000
– Interest Expense: (Rupees 2,000)
Total Non-Operating Items: Rupees 3,000
Net Income Before Taxes: Rupees 73,000
Income Taxes: (Rupees 20,000)
Net Income: Rupees 53,000
- The first line shows the total money earned by the company from its sales and other activities. In this example, XYZ Company earned Rupees 500,000.
- Subtract the Cost of Goods Sold (COGS) right from Revenue to find the Gross Profit. In this case, the Gross Profit is Rupees 250,000 (Rupees 500,000 – Rupees 250,000).
- Operating Expenses are costs related to running the day-to-day operations of the business. They include selling, marketing, research, development, and administrative expenses. The total Operating Expenses here are Rupees 180,000.
- Subtract Total Operating Expenses directly from Gross Profit to find Operating Income. In this example, Operating Income is Rupees 70,000 (250,000 – 180,000).
- Non-operating items, like interest income and expenses, are listed separately. These are gains or losses from activities unrelated to the core business operations. Here, the total Non-Operating Items are Rupees 3,000.
- Add Operating Income and Total Non-Operating Items to get Net Income Before Taxes. In this case, it’s Rupees 73,000 (Rupees 70,000 + Rupees 3,000).
- Subtract Income Taxes right from Net Income Before Taxes to get the final Net Income. In this example, Income Taxes are Rupees 20,000, resulting in a Net Income of Rupees 53,000.
The Bottom Line
A profit loss income statement offers deep insights into several aspects of the company. It offers timely updates on the business performance as they are generated more frequently than any other statement. That means it helps the business owner to know the company’s expenses, gains, losses, etc.
Frequently Asked Questions
1. What are the main elements of statement of income?
The main four expenses are Revenue, gains, losses, and expenses.
2. What is the difference between an income statement and a profit and loss account?
According to accounting experts, both are the same as they offer the overall figures of the business profit and loss in a particular period.
3. What is an income statement?
A profit loss income statement is a financial record businesses maintain to know their profit and losses.