To prepare an income statement, a small business must analyze and report the income, operating expenses, and gross profit or loss incurred for the reporting period. The income statement, also known as the profit and loss statement, is one of the main financial reports produced by a business, along with the balance sheet and cash flow statement.
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What Is An Income Statement?
Income statements or profit and loss accounts are financial statements used to calculate the financial health of the company.
It shows the company’s revenues and expenses during a particular period, which can be selected according to the company’s needs. A P&L, which stands for profit and loss, indicates how the revenues are transformed into net profit.
A quarterly income statement shows the gross profit or loss generated by your business over a three-month period. It can also be referred to as a profit or loss account and is a crucial financial statement that shows the business’s operating income and expenditures, detailing your net income or net profits.
| What goes in an income statement? | Definition¹ |
|---|---|
| Revenue | All of the money your business earns from selling its goods and services |
| Cost of Goods Sold | The true cost to produce and sell goods or services, including raw material and labor needed. |
| Operating Expenses | All expenses incurred to keep the business running as normal, such as rent. |
| Depreciation | Expenses that incur over time, such as the declining value of equipment and assets. |
| Gross Profit | The total profit your business earns, after subtracting the cost of goods. |
How to prepare an income statement in 9 steps
1. Pick a Reporting Period
The first step in preparing an income statement is to choose the reporting period your report will cover. Businesses typically choose to report their P&L on an annual, quarterly, or monthly basis. Publicly traded companies are required to prepare financial statements on a quarterly and yearly basis, but small businesses aren’t as heavily regulated in their reporting.
Creating monthly income statements can help you identify trends in your gross profit and expenditures over time. That information can help you make business decisions to make your company more efficient and profitable.
2. Generate a Trial Balance Report
To create an income statement for your business, you’ll need to print out a standard trial balance report. You can quickly generate the trial balance through your cloud-based accounting software. Trial balance reports are internal documents that list the end balance of each account in the general ledger for a specific reporting period.
Creating balance sheets is a crucial part of creating a profit and loss, as it’s how a company gathers data for its account balances. It will give you all the end balance figures you need to create an income statement.
3. Calculate Your Revenue
Next, you’ll need to calculate your business’s total sales revenue for the reporting period. Your revenue includes all the money earned for your services during the reporting period, even if you haven’t yet received all the payments. Add up all the revenue line items from your trial balance report and enter the total amount in the revenue line item of your P&L.
FreshBooks accounting software provides an easy-to-follow accounting formula to make sure that you’re calculating the right amounts and creating an accurate income statement.
4. Determine the Cost of Goods Sold
Your cost of goods sold includes the direct labor, materials, and overhead operating expenses you’ve incurred to provide your goods or services. Add up all the cost of goods sold line items on your trial balance report and list the total cost of goods sold on the statement directly below the revenue line item.
5. Calculate the Gross Margin
Subtract the cost of goods sold total from the revenue total on your income statement. This calculation will give you the gross margin, or the gross amount earned from the sale of your goods and services.
6. Include Operating Expenses
Add up all the operating expenses listed on your trial balance report. Each expense line should be double-checked to make sure you have the correct figures. Enter the total amount into the statement as the selling and administrative operating expenses line item. It’s located directly below the gross margin line.
7. Calculate Your Income
Subtract the selling and administrative expenses total from the gross margin. Doing this will give you the amount of pre-tax operating income. Enter the amount at the bottom of the income statement.
8. Include Income Taxes
To calculate income tax, multiply your applicable state tax rate by your pre-tax income figure. Add this to the statement below the pre-tax income figure.
9. Calculate Net Income
To determine your business’s net income, subtract the income tax from the pre-tax income figure. Enter the figure net income into the final line item of your income statement. This will give you a general understanding of your business performance, letting you see how profitable you have been.
10. Finalize the Income Statement
To finalize your statement, add a header to the report identifying it as an income statement. Add your business details and the reporting period covered by the profit and loss. With all of the data you’ve compiled, you’ve now created an accurate statement.
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.
Don’t let income statements monopolize your time. FreshBooks offers a wide variety of accounting services that save you time and money when creating financial statements. Learn more about FreshBooks accounting software and give them a try for free.
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