Question

Describe the parts of an income statement.

Answer 1

What is an income statement?

An income statement is a financial statement that shows you how profitable your business was over a given reporting period. It shows your revenue, minus your expenses and losses.

Also sometimes called a “net income statement” or a “statement of earnings”, the income statement is one of the three most important financial statements in financial accounting, along with the balance sheet and the cash flow statement (or statement of cash flows).

Small businesses typically start producing income statements when a bank or investor wants to see how profitable their business is.

When a business makes an income statement for internal use only, they’ll sometimes refer to it as a “profit and loss statement” (or P&L).

Sales revenue

Every income statement begins with your company’s revenues.

How you calculate this figure will depend on whether or not you do cash or accrual accounting and how your company recognizes revenue, especially if you’re just calculating revenue for a single month.

Generally speaking, this figure will simply represent your total revenue for whatever time period the income statement is covering. (In this case, the time period is the year ending on December 31, 2018.)

Cost of goods sold

Often shortened to “COGS,” this is how much it cost to produce all of the goods or services you sold to your customers.

COGS only involves direct expenses like raw materials, labour and shipping costs. If you roast and sell coffee like Coffee Roaster Enterprises, for example, this might include the cost of raw coffee beans, wages, and packaging.

Indirect expenses like utilities, bank fees and rent are not included in COGS—we put those in a separate category.

Gross profit

This is what you get when you subtract total COGS from revenue. Gross profit tells you how profitable your business is after taking into account direct costs, but before taking into account overhead costs. It’s a rough measure of how efficient your business is.

General expenses

Also sometimes referred to as “operating expenses,” these include rent, bank & ATM fee expenses, equipment expenses, marketing & advertising expenses, merchant fees, and any other expenses you need to make to keep your business going.

These expenses are listed individually here, but some income statements will bundle these and other similar expenses together into one broad category called “Selling, General & Administrative Expenses” (SG&A).

Operating earnings

This is how profitable your business is after taking into account all internal costs, which you have more control over, but before taking into account external costs like loan interest payments and taxes, which you have less control over.

Accountants will sometimes call this Operating Profit or Operating Income.

Interest expense

If your business owes someone money, it probably has to make monthly interest payments. Your interest expenses are the total interest payments your business made to its creditors for the period covered by the income statement.

Earnings before income tax

This is your business’s profitability before it pays its taxes.

Income tax expense

This is how much you paid to the income tax authorities.

Net profit

net profit that has remained among the shareholders for distribution either as dividend or retaind earnings