Income Statement Definition, Explanation and Examples

income statement accounting example

Veristrat defines operating income as the money you make from your core business, whether that’s performing throat surgeries, landscaping or selling fair-trade coffee. If business is sluggish, lumping in sales income with income from asset sales might hide how poorly you’re doing. By failing to record the inventory loss, Rite Aid overstated inventory (an asset) on the balance sheet by $9,000,000 and understated cost of goods sold (an expense) by $9,000,000 on the income statement. This ultimately increased profit by $9,000,000 because reported expenses were too low. The income statement is read from top to bottom, starting with revenues, sometimes called the «top line.» Expenses and costs are subtracted, followed by taxes. The end result is the company’s net income—or profit—before paying any dividends.

  • If the net income is a positive number, the business reports a profit.
  • An income statement tallies income and expenses; a balance sheet, on the other hand, records assets, liabilities, and equity.
  • We accept payments via credit card, wire transfer, Western Union, and (when available) bank loan.
  • Research analysts use the income statement to compare year-on-year and quarter-on-quarter performance.
  • In this case, the statement of owner’s equity uses the net income (or net loss) amount from the income statement (Net Income, $5,800).
  • Next, we account for the increase in value as a result of net income, which was determined in the income statement to be $5,800.

The income statement is one of three statements used in both corporate finance (including financial modeling) and accounting. The statement displays the company’s revenue, costs, gross profit, selling and administrative expenses, other expenses and income, taxes paid, and net profit in a coherent and logical manner. It received $25,800 from the sale of sports goods and $5,000 from training services. It spent various amounts listed for the given activities that total of $10,650. It realized net gains of $2,000 from the sale of an old van, and it incurred losses worth $800 for settling a dispute raised by a consumer. The above example is the simplest form of income statement that any standard business can generate.

Expenses and Losses

The balance sheet and the income statement are two of the three major financial statements that small businesses prepare to report on their financial performance, along with the cash flow statement. Income law firm bookkeeping statements depict a company’s financial performance over a reporting period. The income and expense accounts can also be subdivided to calculate gross profit and the income or loss from operations.

An organization located in a unique industry may find that it requires additional accounts beyond the ones noted here. Thus, the exact set of income statement accounts used will vary by company. Learning how to read and understand an income statement can enable you to make more informed decisions about a company, whether it’s your own, your employer, or a potential investment. Because of this, horizontal analysis is important to investors and analysts. By conducting a horizontal analysis, you can tell what’s been driving an organization’s financial performance over the years and spot trends and growth patterns, line item by line item.

Download an income statement template.

The interest income and expense are then added or subtracted from the operating profits to arrive at operating profit before income tax. Single-step income statements are easy to prepare and easy to interpret. In many cases, single-step income statements are sufficient for small businesses. Note that single-step income statements will show strictly operating costs.

income statement accounting example

Accessing balance sheet and income statement software is a surefire way to save you time, stress, and money — as you make the right decisions towards letting your business be the best that it can be. FreshBooks provides a range of income statement and balance sheet examples to suit a variety of businesses, no matter if you have just started out or if you are looking for a different solution. Consider enrolling in Financial Accounting or our other online finance and accounting courses, which can teach you the key financial topics you need to understand business performance and potential. Download our free course flowchart to determine which best aligns with your goals. This type of analysis makes it simple to compare financial statements across periods and industries, and between companies, because you can see relative proportions.

How to prepare an income statement for your small business

Next companies must account for interest income and interest expense. Interest income is the money companies make from keeping their cash in interest-bearing savings accounts, money market funds and the like. On the other hand, interest expense is the money companies paid in interest for money they borrow. Some income statements show interest income and interest expense separately.

income statement accounting example

This statement will give you a future understanding of your company’s fiscal health that will be of great benefit to you and your business practice. Below is a 10-step guide on how to write a professional income statement. Using this process, along with the FreshBooks income statement template, allows you to simply fill in the details rather than spending time creating an entire document from scratch. Consider enrolling in Financial Accounting—one of three courses comprising our Credential of Readiness (CORe) program—which can teach you the key financial topics you need to understand business performance and potential. Net profit, also called “net sales” or “net earnings,” is the total profit for your business.

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