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What Is The Purpose of an Income Statement?

The income statement is a results-oriented report, showing the net income or loss over a specified period. It lists the total revenues and expenses that occurred over the period, leading to a total calculation of how much money was ultimately gained or lost.

The short version: your income statement tells you if your business was profitable over a certain time period. And if so, by how much.

What Does an Income Statement Show?

The income statement is broken into three main sections:

The revenue section includes all revenue that is recognized during the period. If running on accrual basis accounting, this means including all revenue you have invoiced for, even if you haven’t received the payment yet.

The cost of sales, also called cost of goods sold, takes into account all costs that are directly related to producing and selling a product. This may include materials purchased or direct labor costs paid during the period. It does not include broader sales and marketing spends.

Subtracting cost of sales from revenue gives you gross profit.

The operating expenses portion comes next and includes everything else you spent money on in the period that wasn’t directly linked to a sale. This includes line items like rent, utilities, bank fees, wages and salaries, and sales and marketing expenses.

When you subtract all operating expenses from the gross profit, you’re left with net income.

Balance Sheet vs. Income Statement: What Does the Income Statement Not Show?

What does the income statement not show, you ask? In short, context.

The income statement shows what happened over a set period of time. The balance sheet, in contrast, shows the state of the entire business at a single point of time. It takes all assets, liabilities, and equity into account to examine the liquidity of the business.

The income statement shows only shows a delta, or how much was taken in or lost during a period. It does not provide insight into the overall or long-term health of the company. That’s where the balance sheet comes in.

How to Read the Income Statement

To read an income statement, start by looking at the net income number. Is it positive or negative? Did you make a profit or lose money over the reported period?

If the number is negative, you can investigate the cause by comparing this income statement to past ones. Was revenue lower or were operating expenses higher than normal? If you have had consistently down months, you can look at your biggest expenses and analyze if there are any ways to cut them back.

In other words, start big and use the more granular details to answer your questions about what happened. If you have goals set around revenue or profit, the income statement totals will let you know if you are target to hit those goals or not.

For a more detailed explanation of how to read your income statement, check out our complete guide to reading financial statements.

Sample Income Statement

Income Statement

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