Income Statement
This series began with a general introduction to the three basic financial statements. Now, we will take a closer look at the Income Statement, often referred to as Profit and Loss or P&L.
The Income Statement reports the outcome of the company doing business over a period of time (such as a month, quarter, or year.) This report is intended to show how much the company makes (or loses) in the course of conducting its business.
The income Statement format is routinely presented in the following order:
- Proceeds from sales
- Cost of producing/delivering products or services
- Expenses to operate the business itself
- Other Income and Expense (not directly related to the primary business)
Here are the common sections of the Income Statement in order of presentation with explanations of what transactions are represented in each:
Sales
- Amounts billed to customers for delivery of the company goods or services (not including applicable Sales Tax listed on the invoice)
- This section is often broken down by type of Sale, such as Products, Services, and Repair
- Orders booked but not yet delivered are not generally considered recordable sales
- Orders booked but not yet delivered are not generally considered recordable sales
Cost of Sales
- For each type of Sales, there should be a representation of the direct costs of producing or delivering it including Materials, Labor, and some elements of Overhead.
- Cost of Sales also includes the infrastructure and staff needed to insure the functionality of the product in the field
Operating Expenses
- Management and staff to run the business
- Office equipment and supplies
- Travel and Entertainment Expenses
- Marketing and Advertising
- Period Expense: Rent, Utilities, Phone, etc.
- Corporate Expense: Legal, accounting, and tax advisors as well as professional licensing (if required for your industry)
Non-Operating Income/<Expense> in general, are not related to the primary mission of the company but are the result of management decisions on how to run the company
- Interest Income on excess cash invested
- Interest Expense on credit cards and corporate debts
- Charitable Donations
- Charitable Donations
Income Tax is usually assessed by the company CPA annually but may be required to be paid throughout the year
Net Income (the Bottom Line) is what is left after all of the above items have been added and subtracted. If there is an excess of Income over Expense, this amount is available for reinvestment in the company or distribution to owners. If, however, the company reports a Loss, other funding may be needed to sustain the business.
The business owner who becomes very familiar with all of these sections of their Income Statement will have an edge when it comes to assessing the Bottom Line, which is most often used as the most obvious measure of a company’s success. Of particular focus should be the comparison of the income statements month to month to see emerging trends in the business. This allows for early detection of adverse results so that corrective action can be taken.
It is also a good idea to use other time frames for comparison to reveal both near and long term trends or cycles. The month-to-month changes are at a micro level whereas quarterly or annual comparisons can make the longer-term ebb and flow of the business easier to see.
