How to Prepare an Income Statement

Our expert bookkeepers here at Bench have built an income statement template in Excel that you can use to assess the financial health of your business and turn your financial information into an income statement. The statement is divided into time periods that logically follow the company’s operations. The most common periodic division is monthly (for internal reporting), although certain companies may use a thirteen-period cycle. These periodic statements are aggregated into total values for quarterly and annual results. Preparing financial statements can seem intimidating, but it doesn’t have to be an overwhelming process. We’ve broken down the steps for preparing an income statement, as well as some helpful tips.

Revenue Section

Management also typically prepares departmental statements that break down revenue and expense numbers by business segment. From this information, managers can use accounting software to calculate the net income for the time covered, which is also listed on the statement. Statements may also include intermittent totals at different points, such as operating revenue and income before taxes. Statements may also include net income as a percent of gross revenue (profit margin).

Calculate Operating Expenses

Revenue may also be referred to as the “top line,” because it is the first line on the income statement. Operating revenue is realized through a business’ primary activity, such as selling its products. Non-operating revenue comes from ancillary sources such as interest income from capital held in a bank or income from rental of business property.

Non-Operating Revenue

The operating section includes sales, cost of goods sold, and all selling and admin expenses. The non-operating section includes other income or expenses like interest or insurance proceeds. These “buckets” may be further divided into individual line items, depending on a company’s policy and the granularity of its income statement. For example, revenue is often split out by product line or company division, while expenses may be broken down into procurement costs, wages, rent, and interest paid on debt. Common size income statements include an additional column of data summarizing each line item as a percentage of your total revenue. You don’t need fancy accounting software or an accounting degree to create an income statement.

The Importance of an Income Statement

Operating income is calculated by subtracting operating expenses from the gross profit. The income statement is one of three statements used in both corporate finance (including financial modeling) and accounting. The statement displays the company’s revenue, costs, gross profit, selling and administrative expenses, other expenses and income, taxes paid, and net profit in a coherent and logical manner. Reducing total operating expenses from total revenue leads to operating income (or loss) of $69.92 billion ($168.09 billion – $98.18 billion). This figure represents the earnings before interest and taxes (EBIT) for its core business activities and is again used later to derive the net income. The Income Statement is one of a company’s core financial statements that shows their profit and loss over a period of time.

These are all expenses that go toward a loss-making sale of long-term assets, one-time or any other unusual costs, or expenses toward lawsuits. Amanda Bellucco-Chatham is an editor, writer, and fact-checker with years of experience researching personal finance topics. Specialties include general financial planning, career development, lending, retirement, tax preparation, and credit.

1. We also allow you to split your payment across 2 separate credit card transactions or send a payment link email to another person on your behalf.
2. Non-operating revenue comes from ancillary sources such as interest income from capital held in a bank or income from rental of business property.
3. The single-step format is useful for getting a snapshot of your company’s profitability, and not much else, which is why it’s not as common as the multi-step income statement.
4. To create an income statement for your business, you’ll need to print out a standard trial balance report.
5. Below is a 10-step guide on how to write a professional income statement.

Some candidates may qualify for scholarships or financial aid, which will be credited against the Program Fee once eligibility is determined. Please refer to the Payment & Financial Aid page for further information. Here’s an overview of the information found in an income statement, along with a step-by-step look at the process of preparing https://www.online-accounting.net/depreciable-asset-definition/ one for your organization. Internal users like company management and the board of directors use this statement to analyze the business as a whole and make decisions on how it is run. For example, they use performance numbers to gauge whether they should open new branch, close a department, or increase production of a product.

When you depreciate assets, you can plan how much money is written off each year, giving you more control over your finances. How you calculate this figure will depend on whether or not you do cash or accrual accounting and how your company recognizes revenue, https://www.online-accounting.net/ especially if you’re just calculating revenue for a single month. After deducting all the above expenses, we finally arrive at the first subtotal on the income statement, Operating Income (also known as EBIT or Earnings Before Interest and Taxes).

Competitors also may use them to gain insights about the success parameters of a company and focus areas such as lifting R&D spending. These are all expenses incurred for earning the average operating revenue linked to the primary activity of the business. They include the cost of goods sold (COGS); selling, general, and administrative (SG&A) expenses; cost driver depreciation or amortization; and research and development (R&D) expenses. Typical items that make up the list are employee wages, sales commissions, and expenses for utilities such as electricity and transportation. It shows the company’s revenues and expenses during a particular period, which can be selected according to the company’s needs.

As a working professional, business owner, entrepreneur, or investor, knowing how to read and analyze data from an income statement—one of the most important financial documents that companies produce—is a critical skill to have. It shows you how much money flowed into and out of your business over a certain period of time. Depreciation expenses are reported like any other normal business expense on your income statement, but where you include it depends on the nature of the asset being depreciated. When a business owner makes an income statement for internal use only, they’ll sometimes refer to it as a “profit and loss statement” (or P&L). There is no gross profit subtotal, as the cost of sales is grouped with all other expenses, which include fulfillment, marketing, technology, content, general and administration (G&A), and other expenses.

In financial accounting — one of the most common types of accounting — many in-depth reports are fundamental, including the income statement. While your accounting software can generate these reports for you automatically, it’s still essential to understand what they are and what they signify. This way, you know how often to generate these reports, who should see them and why they matter so much.

Also known as profit and loss (P&L) statements, income statements summarize all income and expenses over a given period, including the cumulative impact of revenue, gain, expense, and loss transactions. Income statements are often shared as quarterly and annual reports, showing financial trends and comparisons over time. Income statement reports show financial performance based on revenues, expenses, and net income.