Your company’s income statement is also sometimes called the “profit and loss statement.” This is one of the three primary financial reports that you should complete and review regularly to ensure that your company’s financial health is up to par. The other financial statements that should be on your list include the statement of cash flows and your balance sheet.
Why the Income Statement Is Important
The income statement is essential because it tells you whether your business is earning a profit over a certain period, whether it be a month, quarter, or year. An income statement gives a broad overview of your company’s revenue and expenses, leading to its bottom line result.
If your company doesn’t hit its goals or goes over budget in certain areas, you might get your first indication when you view your income statement for a given period. This can prompt you to take a more focused look at these areas to identify solutions moving forward.
Breakdown of a Typical Income Statement
The list below is a line by line representation of a typical income statement. After the deduction for each expense, you’ll be able to see your profit or loss as the statement progresses.
- Line 1 is your gross sales figure. In this example, your business made $500,000 in a year from selling products, even if it hasn’t collected all of the money from customers yet.
- Line 2 is your figure for the cost of goods sold, or $200,000. This is generally the largest expense for a company and includes materials and direct labor costs.
- Line 3 is your gross profit, which equals sales – cost of goods sold.
- Line 4 is your company’s sales and administrative expenses. In this example, you spent $100,000 on office and selling expenses which might include rent, utilities, and sales commissions.
- Line 5 is any depreciation expense related to equipment or real estate, which is $40,000 in this example.
- Line 6 is the operating profit, also referred to as earnings before interest and taxes (EBIT). This is equal to your gross profit less selling & administration expense and depreciation.
- Line 7 is any interest expense that your company has on its debt, which is $10,000 in this example.
- Line 8 is your earnings before taxes (EBT), which you arrive at by taking EBIT minus your interest expense.
- Line 9 lists any taxes you pay (federal, state, & local). 21 percent was used in this example.
- Line 10 is your earnings available to common shareholders, which is your EBT minus taxes.
- Line 11 refers to any dividends paid to shareholders or a salary paid to the company owner.
- Line 12 is your bottom line result. This net profit or loss is determined by taking the figure from line 10 and subtracting the figure from line 11, which is an $88,500 profit in this case.
Income Statement for ABC Company For Year Ending Dec 2019
- Sales – $500,000
- Cost of Goods Sold -$200,000
- Gross Profit – $300,000
- Selling & Administrative Expenses – $100,000
- Depreciation – $40,000
- Operating Profit (EBIT) -$160,000
- Interest – $10,000
- Earnings Before Taxes (EBT) – $150,000
- Taxes (21%) – $31,500
- Earnings Available to Common Shareholders – $118,500
- Dividends or Owner Draw – $30,000
- Net Income – $88,500
While this provides an overview of how to interpret an income statement, this isn’t a report your business needs to compile on its own. While you focus on your core business, it makes sense to partner with a team of knowledgeable accounting and financial professionals that can help you stay on track and achieve your goals.
At Chicagoland CPAs, our group of certified public accountants and advisors provide financial management, tax, and accounting solutions for small businesses throughout the Chicago area. Contact us now for more information about our services.