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What Is an Income Statement? Definition and Guide

what is an income statement

The income statement is an overview of how a business is performing over a particular accounting period such as month, quarter or year. It indicates where income is coming from, where expenses arise while also showing the net profit or loss during the time period.

Keeping an income statement

A typical store will keep an income statement that gives an accurate account of revenue streams over the financial time period. The terms of the income statement come usually under two headings:

Revenues:

  • Income from primary activity such as retail sales
  • Income from non-primary activity such as interest on bank balances or rental income
  • Gains such as the sale of property or equipment when sold at profit.

Expenses and Losses:

  • Expenses from primary activity like purchasing stock for sale
  • Expenses from non-primary store activity such as interest on any loans.
  • Losses covering a loss from the sale of an asset below the original cost price.

The important line in an income statement is the one at the bottom of the page. If the revenues exceed expenses and losses then the store has a ‘net profit’ entry. If the opposite occurs, when expenses and losses exceed revenues, then the store has a ‘net loss’ entry, not a very desirable one.

See also: What Is Profit Margin? Definition and Guide

An accurate picture of a business

An investor, banker or potential partner will always request the income statement from the most recent accounting period. From looking at it, they will get an accurate picture of the store’s health, its cash flow, how it is performing and if any losses are sustainable or likely to pull the store into trouble.

The income statement will show if the store is capable of operating profitably. When net revenues are positive it is good sign. The store can show that it is paying bills on time and selling stock to cover costs. It may also show that the owner is capable of running the business properly and loans, debts and creditors are under control

By comparing with income statements from previous accounting periods a banker or investor will also see how a business is growing or declining. If there is a sudden net loss, alarm bells may ring, causing the reduction in credit facilities or investors declining any further requests.

Income Statement FAQ

What is income statement and its purpose?

An income statement (also known as a profit and loss statement) is a financial statement that summarizes the revenues, costs, and expenses incurred during a given period, typically a fiscal quarter or year. The purpose of the income statement is to show a company's profitability during a given period. It reveals the ability of a company to generate sales, manage expenses, and create profits.

What are the 4 parts of an income statement?

  • Revenue: The total amount of money earned from sales of goods and services.
  • Expenses: The cost of goods, services, and other costs associated with running a business.
  • Net Income: The difference between revenue and expenses.
  • Tax Expense: The amount of money paid to the government in taxes.
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