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What is an Income Statement

The income statement is one of the three major financial statements used in accounting related transactions. It is a financial statement that calculates a company's financial performance over a definite accounting period. It is sometimes referred to as the "statement of revenue and expense” or “profit and loss statement." The income statement is presenting the profitability of a company after a specific period of time. It is a key indicator since the profit from sales and the expenses are calculated to find out the total income. Income statement sets the future actions required to be taken by an organization to fulfill the organizational goal. The owners and investors can use an income statement to make vital long-term business decisions.

Income Statement Basic Format

The format of the income statement varies according to the differences in the nature of the business. Still, most companies will have some elements common in their income statements. The first element represented is the total sales deducted from the cost of the sales to get the gross profit. The expenses of operating come next to it. All kinds of operating expenses like salaries, utilities, insurance, etc. fall into this category. After deduction of the expenses from the gross margin, we get the earnings before taxes. This amount is finally deducted with income taxes to calculate the net income of the organization. For many large multinational organizations, these income statements are complex and include a wide-ranging set of explanations to the income statement and clarification of financial policies.

How to create an Income Statement

Creating an income statement can help you keep track of your organization’s income during a certain period. The income statement you create will be tailored to your regular accounting needs. It is considered that only a professional can make an income statement, but by following the steps below you can also create an income statement.

Step 1: The basic program usually used to create an income statement is Microsoft Excel. Open excel, add the title “Income statement” at the top of the page. Under it, list the name of the organization. Add the effective date of the income statement under the title.

Step 2: Name the first two entries of the column as sales and cost of sales. Set formulas on the right column beside it to deduct sales from the cost of sales to get the gross margin. Remember, there can also be other items that may be included under cost sales in some cases.

Step 3: Below gross margin, add the next element as expenses. Under expenses, list all the regular expenditures incurred by the organization for operating. The list includes items like salary, utilities, depreciation, etc. Set up a formula to total all the expenses and name them Total expenses.

Step 4: Now below total expenses add the field to enter the taxes incurred during the period. Set the formula to deduct taxes with total expenses to get the net income.

Step 5: You can now calculate the net income of an organization using this template. Make changes in the values of each element in the spreadsheet to see if it changes in real-time. You can use borders and highlight the totals of each section.

More Tips about Income Statement

1. Income statements basically have three separate sections. The first segment of the income statement computes gross profit deducting sales revenue from the cost of sales. The next segment calculates operating earnings before taxes deducting gross profit from operating expenses. The last segment computes the net income deducting taxes from earnings before taxes.

2. In some cases there is another segment added in the income statement as non-operating income and expenses. Non-operating income and expenses are the portions of income that results from operations that are not associated with the core operations of an organization.

3. Prospective investors use income statements to carry out financial analysis, which is a key factor in making an investment choice. For example, earnings per share (EPS) are calculated using income generated by the company according to the income statement. It is a very important tool to quickly analyze a firm’s financial situation.

4. Government bodies like tax authorities require financial statements to determine the modesty and accurateness of taxes stated and compensated by the company.

5. Suppliers need an income statement to assess the worth of a business and determine whether to supply goods on credit. They also need it to know if the organization will be able to pay on time.