What Is an Income Statement?

An income statement is a business document in the form of a report that covers the core financial statements of a business that details the profit and loss for a particular period. An income statement is also known as the profit and loss statement of a company. An organization determines the income and loss of a company by taking the total revenue and subtracting all incurred expenses from operational and non-operational tasks and activities. Companies utilize the income statement to summarize monthly, quarterly, and annual expense and income operations. The income statement is one of three statements that are used by different industries and companies for corporate financial reporting and accounting. The purpose of an income statement is to demonstrate the profitability of a business. It is also a way for a company to regulate its organizational budget by avoiding unnecessary spending more than it can afford. The income statement determines whether the business generates income or incurs loss for a specific period. Income statements contain various periods that follow different business operations. Constructing financial models also start with an income statement because it requires the least amount of information in comparison to cash flow statements and balance sheets. As such, a cash flow statement and a balance sheet come from information in an income statement.

According to the statistical data and information coming from Statista, Apple records the highest net profit of over 57.4 billion US dollars among the 50 top companies in the world for the year 2020. Saudi Aramco comes in second place with profits amounting to 49.27 billion US dollars for the same year.

Components of an Income Statement

An income statement varies from one company to another, and the income and expenses are dependent on the industry, type of business, and type of operations that an organization runs. The format of the document depends on the regulatory requirements, diverse business needs, and the operating activities of a particular company. However, there are several general components that the income statement must contain that are common in many similar documents. The section below covers the different elements of an income statement with descriptions to provide additional information about each one.

Revenue or sales: The sales or revenue section is the first section of the income statement that provides information about the summary of the gross sales and income the company makes from selling goods and providing services for a particular period. How the company computes the sales or revenue depends on whether or not the company implements cash or accrual accounting and how the organization classifies revenue. There are two types of revenue when it comes to businesses; operating and non-operating revenue. Operating sales refer to the acquired revenue by performing primary tasks and activities like producing goods and delivering services. Non-operating revenue refers to gained revenue from executing non-core business activities like the installation, maintenance, and operation of systems.Cost of goods sold: The cost of goods sold (COGS) section refers to the total cost to produce the products and services that a company sells to its consumers. If the company provides services to its clients and customers, another term used is the cost of sales. COGS only inclusive of direct expenses, including raw materials, labor, and shipping costs. The COGS also contains an allocation for other expenses that are subject to depreciation. Gross profit: Gross profit is the amount that results from subtracting the total COGS from the revenue. The gross profit section determines whether a business is profitable after considering the direct costs before it subtracts the indirect costs or overhead costs. The gross profit is a rough estimation of the business efficiency.Marketing, advertising, and promotion expenses: This section of the income statement covers the expenses related to selling goods or performing services. Marketing events, advertising plans, and promotional expenses are in a group since they cover similar expenses that relate to sales.General expenses: General expenses are also known as operating expenses. This section includes rental fees, bank and ATM expenses, equipment costs, merchant fees, and other expenses that the business incurs to keep daily operations running smoothly. Expenses are in this section individually or in bundles, depending on their similarities into a broad and more general category which is the selling, general, and administrative expenses (SG&A). If there are unrelated expenses to the core business activities, these are non-operating expenses.Operating earnings: The operating earnings section represents the company revenue from regular business operations. It is the profit that the company receives before any deduction on the non-operating income, non-operating expenses, taxes, and interests from the revenue. Accounting teams also call operating earnings operating income, revenue, or earnings before interest and taxes (EBIT).Interest expenses: If the business owes money from a bank loan or any other entity, it must return the money through monthly payments with interest. The interest expenses section refers to the total expenses in interest payments that the company incurs to its creditors for the period that the income statement covers. It is common for companies to separate the interest expense and interest income to differentiate and reconcile EBIT and earnings before tax (EBT). A debt schedule usually determines the interest expenses of a company.Earnings before income taxes: The earnings before income taxes are also known as the pre-tax income. The computation for the EBT results from subtracting the interest expenses from the operating expenses. It is the final subtotal before getting the amount of the net income.Income taxes: The income taxes section contains the amount of relevant taxes charged against the pre-tax income. The total tax expenses in the income statement can include the current and future taxes of the company.Net profit: Net profit is also known as net income, net sales, or net earnings. The net profit section contains the figure from calculating the difference between the pre-tax income and income taxes. The amount in the net profit section reflects the amount that flows into the retained earnings on the balance sheet after all the necessary deductions.

How To Write a Comprehensive Income Statement

Before the accounting team can proceed to construct the income statement using all the information at hand, they must know how to prepare it. The individuals working on the income statement must understand the essential components of the document, keep detailed records to make it easier to recover information, and decide the process of creating the document, either by hand or through computer software. The following section contains helpful steps to help an individual to construct the income statement.

  • 1. Choose the Duration of the Reporting Period

    The reporting period refers to a specific timeline the income statement covers. Choosing the right timeframe is critical, especially when the statement is for professional or legal purposes. Monthly, quarterly, and annual reporting periods are common for businesses. The reporting period that the accountant chooses depends on the goal of writing the document. Monthly reports detail a shorter period, convenient for applying tactical adjustments that affect the budget for the following month. Quarterly reports and annual reports provide a higher level of data analysis that leads to identifying leads and trends for the long term.

  • 2. Calculate the Total Revenue and the Cost of Goods Sold to Arrive at the Amount of Gross Profit

    After selecting the most appropriate reporting period for the income statement, calculate the total revenue that the company makes within that period. If the income statement speaks for the entire organization, it must consist of all the revenue from all facets and departments of the business. If the individual needs to prepare the income statement for a particular area of the business, they must make sure to limit the revenue to the products or services within that group. The next step is to calculate the cost of goods sold for the products or services that generate income for the business during the reporting period. It consists of the direct and indirect costs of producing and selling goods and services. The cost of goods sold must include the direct labor expenses, material costs, equipment expenses, distribution costs, and any other expenses that directly affect the production of products and services. After calculating the total revenue and the cost of goods sold, determine the gross profit by getting the difference between the two.

  • 3. Calculate the Operating Expenses

    After acquiring the figures for the gross profit, the next step is to calculate the operating expenses. These expenses are the indirect costs that are not associated with daily business operations. It differs from the COGS because these do not have a direct effect on the production of the goods and services that the company offers its customers. The operating expenses include costs that involve rent payments, utilities, overhead expenses, office supplies, and legal fees.

  • 4. Calculate the Business Income

    To calculate the total income for the reporting period, get the difference between the gross profit and the operating expenses. It is also the pre-tax income that the company acquires within the reporting period.

  • 5. Compute the Interests and Tax Deductions

    After calculating the income, the next step is to determine the interests and tax expenses. Interest is the debt or loan that the business needs to repay. In calculating the interest, there must be an understanding of how much the business owes and the interest rate that accompanies the amount. Also, calculate the tax charges for the reporting period, including federal, state, and local taxes and payroll taxes.

  • 6. Calculate the Net Income

    The final step in making the income statement is to calculate the net income of the business. Subtract the interests and the taxes from the business income. The resulting amount reflects the available funds of the business that it can use for added reserves, research and development, and business expansion.


What are the three most essential components of an income statement?

The most essential elements of the income statement are revenue, expenses, and income.

What is the general formula to use when calculating the income statement?

To acquire the income of a business, subtract the organization’s expenses from the total revenue.

What is the purpose of writing the income statement?

The purpose of having an income statement for the company is to demonstrate its financial performance over a specific period. It speaks about the financial story of the company through its activities and operations.

When writing the income statement for a company, make sure to gather all the necessary information to compute its revenue for a specific period. Despite not having a format for constructing the income statement, make sure to follow all regulatory requirements, considering the business needs and the operating activities the company performs for the reporting period. It takes skill and experience to construct an accurate income statement. To help you create the document, download the 20+ Sample Income Statement in PDF | MS Word from Sample.net to construct a comprehensive income statement.