Accounting Basics - What is Income Statement?

By: beyli


profit or loss, during the particular period. Income statements are produced by a business at various periods. They may be produced daily, monthly, yearly, etc. This statement allows the users quickly get simplified and accurate knowledge on the financial status of the entity. Income statements may be compared to evaluate the progress of a business, financial status over several accounting periods or to predict the future progress and development trends of business.

Usually income statement has the following main parts:

* First part - total revenue. This is a gross amount for which goods were sold or services were provided to the customers of the business. Gross means that no expenses related to these sales were subtracted from the revenue number. It is important to understand that when accrual accounting principle is applied, revenue reflected in the income statement is not equal to the cash received from customer for the goods, i.e. under accrual accounting revenue is the amount business can claim from the customers for goods sold or services provided.
* Second part - cost of goods sold or cost of services provided. This is a cost of goods which were sold to the customers during the period for which income statement is prepared or cost of services provided to the customers for that period. These expenses are attributed to cost of sales as they directly relate to the revenue earned.
* Third part - gross profit. This is a difference between total revenue and cost of sales
* Fourth part - operating expenses. These are expenses uncured by the business for the period, which are also related to earning the total revenue, however not directly. Usually in operating expenses we can find salaries to administrative employees, taxes paid, other charges which are not directly related to sales.
* Fifth part - operating profit. It is a difference between gross profit and operating expenses. In financial literature operating profit usually is called Earning Before Interest and Tax.

The other parts of income statement depend on the particular business. If the business has loans, the income statement will include interest expenses indicated after the operating profit in the income statement. If the business is profitable and pays corporate taxes, these expenses will also be indicated in the income statement.
At the bottom of the income statement is the net income, or the increase in equity, earned during the particular accounting cycle. Net income is a difference between all revenue earned for the period and expenses incurred to earn this revenue.

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