Accounting professionals understand the importance of an accurate income statement...it's a bit like a thermometer—you can use it to gauge whether things are going well or if your company is at risk of going under. But do business owners get it? (If you're an accountant reading this post, share it with your clients!)
By looking at this one report, you can immediately understand whether you're operating at a profit (or a loss—but we hope not!), what your highest expenses are, and what's making you money.
While it’s only one of a number of reports you need to run your business, the income statement is the key to your business' current financial status as well as the main resource to understanding how to better manage your finances. But like any helpful tool, you have to know how it works in order to take full advantage of it.
Keep on reading to get all the answers about what an income statement is, how it’s formatted, and what its benefits are for business owners and accounting professionals.
What Is an Income Statement?
Well, saying that it's a statement of your income and expenses would be a gross oversimplification (amiright, accounting friends?!). That’s also the type of answer we’d expect from a smart-aleck teenager, so we’ll dig deeper and help you get the full picture on your company’s income statement.
An income statement—also known as Profit & Loss (P&L) —is one of the main financial statements of a business. Together, with the Balance Sheet and Cash Flow Statement, you can get a full 360-view of how your business is performing.
Your income statement has the ability to show profit and loss over a period of time, all in one place. In addition, it determines your profit (or loss) by taking all of your revenue and subtracting all of your expenses. In an income statement, your expenses encompass both operating and non-operating activities.
Most business owners and accountants view their income statement in an accounting tool like QuickBooks Online, which integrates with Botkeeper for a single financial view.
Moreover, your income statement is a part of your company's collective performance report that must be submitted to the Securities and Exchange Commission (SEC).
Traditionally, you'll find the income statement divided into monthly segments to mirror the internal reporting of your company. However, similar to other companies, you can also use a thirteen-period cycle, although that’s less common.
It's best to work with your accounting professional to determine to determine what approach is best for you.
The Benefits of Income Statements
If you need a simple list of how your income measures up to your expenses, then why go through all the trouble of creating a specific statement in a rigid, old-school accounting format?
The short answer: because it's worth it. And here's why.
The core benefit of an income statement is its ability to share essential details regarding the profitability and business activities of a company to its stakeholders. However, while showcasing these details, it also provides critical insights into the company's inner workings. This is essential for comparison purposes across different businesses and sectors.
It works like a benchmark report, where every section can be measured against another.
Furthermore, it helps your management make decisions regarding new products or services. And that can lead to an increase in production capacity, which leads to growth.
The Formula of an Income Statement
An income statement highlights four main items: revenue, expenses, gains, and losses. It's also essential to know that income statements don't cover receipts or cash payments/disbursements.
Revenues and Gains
This is your main revenue source. It’s the primary activity(ies) that your business conducts, and as such, the bulk of your revenue comes from it.
When you're getting revenue through secondary or non-core business activities, then that’s considered to be non-operating revenue. This is the type of indirect earnings that come from sources outside of the purchase and sale of goods and services.
Expenses and Losses
Primary Activity Expenses
Primary activity expenses are all costs incurred for earning your regular operating revenue, which is linked to the core activity of your business.
Secondary Activity Expenses
Losses as Expenses
In some cases, you'll find expenses that go toward unusual costs that are either one-time losses or other recurring expenses of a specific type. An example of loss would be a lawyer's monthly retainer to deal with a lawsuit.
Income Statements: A Panoramic Photograph of Your Financials
There will always be a need to take a look at previous income statements to better understand your business' trajectory.
An income statement gives you valuable insights into your business' financial comings and goings. It provides a quick picture of your company's operations, your performance levels, and any potential issues that might eat into your net income.
Rest assured, these are just the basics of an income statement—there’s plenty more to learn!
Getting your income statement is great and all, but what about your financial statement analysis skills? Check out these three techniques for analyzing financial statements, and click below to talk with a Botkeeper rep about how automated bookkeeping can save you time—and money.
And if you're an accounting professional working with small business clients, feel free to share this post with them. We hope it makes life easier, like having an outsourced bookkeeping solution that frees you up to create more value for your clients in other areas. (HINT: click below to learn more about becoming a Botkeeper Partner!)