Keeping detailed accounting records for your business is important for many different reasons. For one, your books hold a wealth of information about the financial state of your business. You can learn a lot about your operations and make smart decisions by looking at the right data.
Accounting reports provide an overview of important financial information in an easy to understand format. There are different types of accounting records that each tell different stories about your business.
Here is why an Income Statement (or Profit and Loss Statement, as it’s also known) is important and what information it includes.
What is an income statement?
An income statement outlines your business’s profits or losses during a specific period of time (i.e. a month, quarter, or year). It breaks down your revenue and expenses so you can understand everything that influences profitability.
What is an income statement used for?
You can use an income statement to get a thorough idea of how your business’s money is earned and spent. You can analyze your expenses and find out if there are any costs that are exceeding the budget you set. You can also learn where your business is excelling by looking at your different revenue sources.
What to include in your Income Statement?
Income statements consist of various sections that outline expenses, revenue, and income. The exact categories might differ from business to business but here is what is included in a typical income statement:
- Sales – Your total revenue for the given time period, organized by sales channel.
- Cost of Goods Sold (COGs) – Any costs your business incurs while creating the products or services it offers for sale. COGs can include the cost of raw materials, labor, or service-related expenditures (often referred to as Cost of Sales).
- Gross Profit – Subtract COGs from sales to calculate your Gross Profit.
- Operating Expenses – Common expenses incurred in the daily operation of your business. This might include payroll, marketing/advertising, utilities, rent, depreciation, insurance, and other overhead costs. This section can be broken down by category so you can easily analyze your expenses.
- Total Expenses – The sum of all your business’s expenses.
- Net Income (Before Taxes) – Subtract your operating expenses from gross profit to calculate your business’s total income before taxes.
- Taxes – The total income tax your business owes for the given time period.
- Net Income – Your business’s total income after paying taxes.
An income statement is crucial to understanding everything that influences your business’s bottom line. The key to generating this accounting report, or any other, is to maintain accurate books.