What Is An Income Statement?
An income statement is an accounting summary document containing information related to analyzing the financial performance of a company. The income statement (also known as a balance sheet, a profit and loss statement, or a statement of revenue and expense), provides information about the financial health of a company and its profitability. This accounting document is of great value to the business itself, as well as external stakeholders (investors and government bodies, etc.). More specifically, the income statement shows the revenue (sales), and expenses (costs), for any given period, as well as the difference between the two. From their income statement, a business will know if it is “in credit” (if their revenue is superior to their expenses), or on the contrary, in deficit – aka “making a loss” or being “in the red”.
An income statement focuses on four key elements, revenue, expenses, gains, and losses, providing valuable insight into company operations and efficiency, any areas of under-performance, and how a business is doing in relation to its industry peers.
This accounting document forms part of the financial statements that a company has to produce at the end of each financial year, along with a balance sheet and trial balance.
Differences Between a Balance Sheet and an Income Statement
Although both of these accounting documents are prepared around the same time, the closure of the financial year, they don’t have the same use.
- A balance sheet shows the final position of a company’s assets, liabilities, and equity at that point in time. It is used to see the difference between what you own and what you owe to your creditors.
- An income statement shows the revenue and expenditure generated throughout a stated period.
The easiest way to remember the difference between an income statement and a balance sheet is to remember that a balance sheet provides a snapshot of a company’s position financially at that moment in time. It will be a report dated for that particular day. An income statement is a report on the financial activity of the company during any given period of time. The from and to date will be displayed at the top of the page.
Why Produce This Accounting Report?
The income statement should answer the following questions for an entrepreneur, self-employed person or small business owner:
- Did the company generate a profit or a loss during the year?
- Is the business profitable?
- Did the business have too many expenses compared with its revenue?
How To Put Together An Income Statement
1) Creating an income statement manually
It is possible to calculate your income, expenses, and net profit manually to produce an accounting report. The presentation of an income statement can vary from one business to the next, based on their activity and the size of the business. There is no standardized format for presenting an income statement and as a result, there are several commonly-used formats that vary in content and length. However, an income statement will always include the operating costs (expenses), and the revenue (earnings), categorized in a table or list.
Income Statement Template for a Service Company:
Income Statement for the Period from ____ to ____
Revenue from the sale of services: ____
GROSS PROFIT: ____
Operational Costs: ____
Salaries and Sales Commissions: ____
Advertising and Promotion: ____
Maintenance and Repair: ____
Interest and Bank Charges: ____
Amortization (Depreciation): ____
NET INCOME (or NET LOSS): ____
Example of an Income Statement
Please find below an example of an income statement for a service company, a marketing and web development agency.
Income Statement for the Period from the 1st January 2018 to the 31st December 2018
Revenue from the sale of services:
Marketing Services: 148 200
Web Development Services: 162 400
GROSS PROFIT: 310 600
Salaries and Sales Commissions: 120 000
Advertising and Promotion: 8 700
Maintenance and Repair: 1 200
Interest and Bank Charges: 250
Rent: 24 000
TOTAL EXPENSES: 154 950
NET INCOME: 155 650
Definitions and Calculations
- Revenue (or earnings, sales, or turnover): cash inflow generated from the commercial activity of a business
- Costs (or expenses): cash outflow (cost) incurred by the business as part of its activity
- Operational costs: all costs that don’t come under the cost of merchandise sold (in the case of a business which sells products)
- Net profit (or net loss): the total revenue subtracted from the total expenses
2) Creating an income statement electronically
If you want to save yourself some trouble and avoid making any mistakes, we recommend using an accounting software such as Kiwili to generate your income statement, balance sheet, trial balance and more. With our software you can generate your income statement at the touch of a button. This means, you can easily generate your income statement from month to month, or as often as you like, rather than waiting for the end of the financial year.
Kiwili’s accounting module provides essential tools for the self-employed and SME’s. Our online software enables you to generate your income statement at any time, free from hassle and with ease. With Kiwili you can work on all kinds of accounting documents and reports, such as balance sheets, trial balances, bank reconciliations and so much more.
Today we’ve covered what an income statement is, how to create one, and provided you with some templates to get started putting together your own. Now you’ve got to grips with the basics and understand the manual process behind generating this accounting document, we’re sure you’ll agree that an all-in-one, cloud-based software with all the accounting tools you need to stay on top of your finances would make a huge difference to your workflow. You can start with a two-week free trial of our accounting software designed specifically for the self-employed and small businesses, to save time and money for your company.
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