The Seven Step Guide to Master the Income Statement
Before we jump into the specifics and walk through an income statement example, we’ll talk high level about its purpose and what information we can get from it. While we’ll call it the income statement throughout this section, it is also referred to as the profit and loss account, earnings statement, revenue statement and many other names.
The income statement is used to show the profitability of a business over a period of time. While the income statement shows us the profitability of a business, it does not tell us the whole story for how a business operates. The rest of the story can be found in the balance sheet and cash flow statement which we will go through later on in other small business financial management lessons.
The income statement flows by taking the total amount of sales, subtracting how much it costs to make those products and finally subtracting any general expenses to get the company’s income over that period. This leads to the equation below:
Sales – Costs & Expenses = Income
So, the income statement is really just a way to tell the profitability of a company over a period of time by subtracting the costs and expenses from the sales to get the income. Keep this in mind as we get into some more of the details of different sections of the income statement. Shown below is an income statement example and how the values are calculated to get the profitability of the business. In the upcoming lessons, we’ll cover each section of the income statement in more detail.
Example of an Income Statement
Key Takeaway: The income statement calculates the profitability or income of a company over a certain period of time by subtracting the costs and expenses from the total sales.