An income statement depicts a company’s profitability over a period of time. In other words, it summarizes revenues and expenses resulting from operating and non-operating activities. It also shows the company’s net profit or loss. It is one of the most important documents in a business’s financial reporting.
Alternative names for income statement
-Profit and loss statement
-Statement of revenue and expenses
Understanding Income Statement
The income statement is a crucial component of a company’s performance reports that must be filed with the Securities and Exchange Commission (SEC). The income statement reports income over a specific time period, whereas the balance sheet provides a snapshot of a company’s financials as of a specific date.
Key Terms that the income statement focuses on:
Operating revenue
Operating revenue is a term used to describe revenue generated by primary activities.
The money earned from the sale of a product by a manufacturer, wholesaler, distributor, or retailer is referred to as revenue from main activities. Similarly, revenue from services refers to the fees a company in the service industry receives for providing particular services.
Non-operating revenue
Revenues realized through secondary, non-core business activities are often referred to as non-operating recurring revenues. These include income from interest earned on business capital lying in the bank, rental income from business property, strategic partnerships, or royalty payment receipts.
Gain
Gains, also known as other income, are the net proceeds from other operations such as the sale of long-term assets. Net income from one-time non-business operations, such as a company selling an outdated transportation van, abandoned land, or a subsidiary company, is included in this category.
Expenses
Also known as operating expenses. These expenses include rent, bank and ATM fees, equipment costs, marketing and advertising costs, merchant fees, and any other costs necessary to keep your business running.
Losses
All costs associated with a loss-making sale of long-term assets, one-time or other unusual costs, or expenses towards lawsuits.
Structure of the Income Statement
For the income statement, the net income is calculated as below:
Net Income = (Revenue + Gain) – (Expenses + Loss)
For example, assume that:
Total Revenue = USD 25,000
Total Expenses = USD 10,500
Gains = USD 2,000
Losses = USD 800
Therefore, the Net Income will be:
Net Income = (Revenue + Gain) – (Expenses + Loss)
= USD (25,000 + 2,000) – USD (10,500 +800)
= USD 15,700
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