Table of Contents
What is an Income Statement?
The income statement is the first of a business’s three most important financial statements. It shows the profits and losses that a business earned over a period of time. For this reason, it is also called the Profit & Loss Account.
The income statement is also the first statement that is released publicly by companies, and you can view the income statements of all publicly listed companies on the internet. (Yes, all public companies!)
For example, Reliance’s income statement also called its Unaudited Condensed Financial Results, is released on its investor relations site.
Why is an Income Statement so Important?
An income statement gauges a business’s financial performance and health. It shows how the business’s money is being spent and how much return it brings. It also highlights problem areas and inefficiencies.
For example, let’s say Mrs Pay, the owner of Razor Bakery, observes from her Income Statement that she is spending too much money on butter, and this expense is driving profits down even though her revenue is high.
Now that she knows exactly why her revenue is not translating into profits, she can choose to cut down on her butter expenses by purchasing from a different supplier or hiking the prices of her baked goods to cover the cost of the butter.
Working of Income Statement
An income statement is divided into income and expenses, followed by profit and loss calculations.
Incomes
The income section of your income statement includes the following line items:
Revenue
Revenue is the money that your business makes from the sale of goods and services, the main source of income for your business. It may also be called “Value of sales of goods and services” or “Revenue from operations”.
A business’s revenue should ideally be greater than, or at least equal to its total expenses. When the revenue earned from sales equals the cost of sales, it is called the breakeven point. It is only after this breakeven point that your business starts becoming profitable.
Other Income
A business might earn money from sources other than the sale of goods and services.
The money earned from Other Incomes will never be as much as the main revenue, but it is a good source of supplementary income for a business.
This line item might also include income from interest or dividends. If your business invests in bonds, stocks, or mutual funds, it is probably earning money from these investments and must be shown on the income statement.
Expenses
After Incomes comes the Expenses section, where your accountant shows how your business spent the money it made.
Cost of Sales
The cost of sales, or cost of goods sold, or cost of materials consumed, is the amount of money that your business spends on actually producing the goods or services that it sells.
For businesses that offer services, this amount would include salaries, the cost of running computers, or other technology used to provide the services.
A business in its initial stages would see a high cost of sales, since operations are new and not as well optimized as can be.
Finance Cost
Another line item under the expenses section could be the finance costs or cost of financing. This is the money spent on borrowing money, like interest paid for loans. The more money a business borrows, the more it spends on financing those loans!
Employee Benefits Expense
The money that a business spends on its employees is included in this line item. It could be money spent on group insurance, contributions to Provident Fund, and staff welfare.
It is important to make sure that your business puts the welfare of its employees first. Retaining talent is crucial to the success of any business.
Depreciation and Amortization
The value of assets owned by the business is subject to reduce every year – this decrease in value is called depreciation.
While depreciation is the reduction in the value of tangible assets or those assets which you can touch, amortization is the reduction in the value of intangible assets or those assets which cannot be touched.
Intangible assets include patents, copyrights, and goodwill.
This expense is unavoidable. The only asset that does not experience depreciation is land and property since land constantly increases in value over time.
Profit or Loss Before Tax
In this line item, the total expenses are deducted from the total income. If the value is positive, then the business has made a profit. If the value is negative, it has made a loss.
Since tax is an unavoidable expense that the business has to incur, profit before tax is a good way of understanding how your business has handled controllable expenses.
Tax Expenses
In this section, the total amount of taxes paid by the business is calculated and listed, so it can be deducted from the Profit Before Taxes amount.
Taxes paid by the business could include TDS, TCS, GST, and Income Tax – it is an expense for the business. Since taxes are legally enforced, no business can avoid paying taxes.
Profit or Loss After Tax
If you deduct tax expenses from the profit before tax amount, you will get the final profit for the period for your business.
This is the amount that is left behind after paying all expenses and taxes – the final amount that can be distributed amongst the owners or reinvested into the business.
If this value is a negative figure, the business’s expenses are more than the income and it has made a loss.
In publicly listed companies, this profit is divided among the many shareholders of the company as EPS or Earnings Per Share. This final figure is the primary way of knowing the profitability of a business.
Income Statement Format
| Particulars | 30 Sep ‘22 | 30 Sep ‘21 |
| Income | ||
| Revenue | ||
| Other Income | ||
| Expenses | ||
| Cost of Goods Sold | ||
| Finance Cost | ||
| Employee Benefits Expenses | ||
| Depreciation and Amortization | ||
| Profit/Loss Before Tax | ||
| Tax Expenses | ||
| Profit/Loss After Tax |
FAQs
What is an income statement?
The income statement is the first of a business’s three most important financial statements. It shows the profits and losses that a business earned over a period of time. For this reason, it is also called the Profit & Loss Account.
What are the three parts of an income statement?
The three parts are: income, expenses and profit/loss.
What is the difference between income and revenue?
Revenue is the money earned by a business from sales of goods or services, or its primary moneymaking activities. A business might earn money from sources other than sale of goods and services. Income is the total money earned by the business, including both revenue and other incomes.
Why is income statement important for businesses?
An income statement gauges a business’s financial performance and health. It shows the business’s revenues, expenses, profits, and losses over a period of time. Income statements are generally prepared on a quarterly or half-yearly basis, and so it provides regular insight into the financial performance of a business.
