Among the three most pivotal financial statements, an income statement or the profit & loss (P&L) statement entails all essential details about your revenues and profits over a fiscal year. Coupled with a Cash Flow Statement and Balance Sheet, it provides investors, stakeholders, and executives with a complete 360 view of a business’s financial health, which in turn helps plan for the future and make timely & informed decisions.

An income statement tells investors and prospective investors whether the company is profitable or not. However, that’s not all. Let’s dive a little deeper and revise Accounting 101 to explore what is an income statement and why it is so important.

What is an Income Statement?

An income statement goes by many names. Some call it P&L statement, statement of income, and statement of earnings, while others use terms like revenue statement or statement of operations. No matter the word, it is all the same. So, next time you hear any of the terms above, don’t fret; it is an income statement.

How does Income Statement work?

An income statement entails a business’s profits and losses details over a defined period or a single year. It includes information about revenues and expenses to help calculate profits and losses.

In expenses, there are both operating and non-operating costs. Every single dollar your business spent over a single year goes into it. In contrast, all the money your business makes goes into revenues.

To derive the net profit or total loss, you need to deduct the total revenue from all the expenses incurred over the fiscal year – That’s Accounting 101.

How Often Do You Make Income Statement?

An income statement is needed more than once a year. Yes, an annual income statement is a must-have for every business. However, to make sound corporate decisions and stay on top of your finances, you better create income statements monthly or quarterly.

See Also: How To Create A Simple Bookkeeping Spreadsheet For Your Business?

Why is Income Statement So Important?

An income statement is important because it helps business owners and executives stay informed about their finances. The better you know your finances, the better you can avoid failure and guarantee success. Here are three ways how an income statement helps you run your business like a pro:

1. Helps Make Better Decisions

In honesty, we can’t overrate how crucial an income statement is to sound decision-making. You can’t make any corporate decision without knowing your actual financial footing. Equipped with the all-important numbers, you can better assess and plot the plan ahead and take actionable steps to make your business successful.

2. Provides an Overview of Financial Health

Is your business making or sucking your bank finances dry? There is no way to know so without reviewing an income statement. The only right and trusted way to assess your business’s financial health is with an income statement in hand.

3. Helps Maintain Compliance

An income statement is more than a mere document that helps you make informed decisions and assess your business’s financial health. Having an up-to-date income statement is an obligation for every business without it, you can’t calculate your tax liability.

An Income Statement Example

Source: Amazon.com

An Income Statement Breakdown

Revenues -> The income or money you made over a specified period.

Expenses -> Cash outflow or the money spent.

Gross Profits -> The profit after deducting the cost of goods sold (COGS).

Operating Income -> The income after deducting gross profits from expenses

Net Income -> The net income after deducting costs, expenses, and taxes

Depreciation -> The decreased value of assets over a specified period

EBITA -> Earnings before depreciation, interest, taxes, and amortization

Important Takeaways

– An income statement is one of the three essential financial statements.

– The other two are the cash flow statement and balance sheet.

– An income statement is made monthly, quarterly, and annually.

– It helps the business assess its financial health and performance.

– It helps executives make timely & informed decisions.

– It shows investors the true profitability of your business.

– It helps identify your business tax liabilities.

Why You Must Learn How To Read An Income Statement?

Every business owner must learn how to read an income statement. It is the least you can do to ensure your business stay on top of your finances. Once you know the key terms and their meaning, reading an income statement gets easy.

Hire a team or outsource the chore to virtual accounting experts. You don’t have to know how to create it to succeed, but every business owner must know how to read it right.

Wajiha Danish

Wajiha Danish is the Director at Monily, overseeing financial strategies and operations for small and medium businesses. She has over 18 years of experience, including her role as Controller at HOCHTIEF PPP Solutions North America. Wajiha's background includes significant roles at Pakistan Petroleum Limited and A.F. Ferguson & Co. (PwC Pakistan). She is a Chartered Certified Accountant (ACCA) and Certified General Accountant (CGA) with expertise in financial management and project finance.