By Morgan International Staff Writers
The income statement, also referred to as the profit and loss is a financial statement showing the company’s revenues and expenses during a period of time. Its purpose is to demonstrate whether the company made or lost money during the reported period. The income statement is an extremely valuable reporting tool for managers and decision makers. So, what are the key things you need to know about an income statement?
- Income statements cover a defined time period
It shows how much money the business made or lost during a specific period of time. Usually businesses will look at their performance on a monthly, quarterly, and yearly basis. Many businesses also produce a year to date view.
- Naming conventions cause undue confusion
I have already pointed out that this financial statement is referred to both as an income statement and a profit and loss. In the same way, naming conventions can differ for the same categories of expenditure or revenue. For example sales and income, expenses and costs, and profit and net income are all used interchangeably. The key thing is to agree as a business what terms will be used, and stick to them.
- Expenses are broken down
Expenses are usually not shown as one line. Normally they are broken down into various types of expense such as cost of goods sold (COGs), and overheads such as rent and utilities.
- Income statements have a simple formula
Some income statements look complex and daunting – however they all follow the same formula – which is revenue minus expenses equals’ profit.
An income statement is very important as it is used by decision makers within the company, but also investors and creditors outside of the company to evaluate profitability and assess risk. Whilst the income statement may seem complex, it is in fact very straightforward when it is kept in mind that in essence it is simply looking at profitability over a set time frame. That said, many businesses do decide to employ a qualified accountant to prepare these statements on their behalf.