Business owners have to understand their finances and accounting to better manage their business. There are several documents that can provide relevant information about a company’s financial position.
These documents include the income statement. Here is more information on this accounting document.
Income statement definition in accounting
The income statement is an important document for preparing a company's financial statement. It is used to document the income and expenses of a company's operating and non-operating activities.
Other calculations are also provided in this document, such as the difference between revenues and expenses. This makes it possible to determine whether the business is profitable or not.
The income statement can be done using two different methods: accrual- or cash-based accounting.
Why generate an income statement?
Income statements are useful to corporate accounting in many different ways. Among other things, this document compares the company’s actual results with its strategic objectives. Based on this result, the company can adjust its plan to move towards a more profitable strategy.
The income statement also makes it possible to see if the company has overspent based on its revenues. It can therefore be useful for developing a budget for the next period.
The difference between balance sheets and income statements
The income statement is sometimes confused with the balance sheet in accounting. These documents are both part of a company's financial statement and are produced at the end of a fiscal year, but they are quite different.
Balance sheets and income statements include and provide different information. The balance sheet is a document that demonstrates the assets and liabilities of a company for a given period. It shows what you own and what you owe to creditors.
The balance sheet is used to determine your company's net worth, whereas the income statement is used to determine the overall profitability of your business.
How to calculate your income statement
To calculate your income statement, you first need to gather a lot of data on the revenues and expenses related to the operating and non-operating activities of your business. This information should include:
- Total sales or service income
- Direct costs (salaries and commissions, depreciation expenses, cost of raw materials, etc.)
- Indirect costs (operating expenses, sales expenses, administrative expenses, etc.).
- Other costs (interest, one-time expenses, etc.)
- Your business tax amount
Income statement calculation example
Income statement for fiscal year January 1, 2020, to December 31, 2020
- Salaries and commissions _____
- Depreciation expenses _____
- Raw materials _____
- Operating expenses _____
- Sales expenses _____
- Administrative expenses _____
- Interest _____
- Moving expenses _____
TOTAL EXPENSES: _____
NET INCOME/LOSS: _____
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In short, the income statement is an essential document in corporate accounting. Owners can have a better overview of their company’s financial position and develop new strategic plans accordingly.
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