What Is an Income Statement? FAQ

Why Income Statements Are Important, and How to Use Them

© Bonny Albo

Dec 3, 2007

An income statement offers an overview of a specific business' profits and losses over a set period of time, such as a year, month or quarter. Income statements basically summarize every expense for your entrepreneurial venture, as well as every source of revenue.

How Can an Entrepreneur Use An Income Statement?

An income statement is used by business owners to track the profitability of their enterprise over a set period of time. Budgeting is a key aspect, and entrepreneurs can easily see where money can be allocated differently using an income statement to further increase profitability.

Why Are Income Statements Important?

Separate from how income statements are important to an entrepreneur, income statements are required to be submitted to the government in most countries for tax purposes. Additionally, many banks and lenders use income statements to show the credit worthiness of a specific business.

What Is in an Income Statement?

The following items comprise an income statement:

1. Sales
   • Sales refers to the amount of money that has been brought into a business, and therefore is used to indicate the revenue made over a specific time period. Different businesses will have different sales categories depending on what kinds of revenue they take in, such as consulting or training revenue and revenue received from the sale of hard goods.
2. Direct Expenses
   • This is where the costs of making a sale are recorded in an income statement. Direct expenses, depending on the type of business and what kind of proprietorship it is, can include employee salaries and shipping.
3. Operating Expenses
   • Operating expenses are the largest category in an income statement, and include many items, such as:
     • Salary, which is what you pay yourself, as owner of the business.
     • Any expenses related to printing materials used for selling the business, such as business cards and sales materials, and are normally referred to as collateral fees.
     • Any advertising expenses are allocated into a separate category in the operating expenses, such as direct mail and marketing campaigns.
     • Other sales may also be included, depending on your business, which refers to any other items used to sell your product or service, such as meals out with clients, equipment rentals or travel.
     • Any and all expenses to the running of your office are also included in an income statement, such as photocopier rentals, utilities, telephone expenses and rent or lease payments.
     • Depreciation of all items that lose value over the course of a year due to their usage is recorded in the operating expenses section as well.
4. Total Expenses
   • Toward the end of the income statement, all of the expenses will be tabulated in this section, minus any interest fees or taxes.
5. Net Income Before Taxes
   • Before taxes are added, this is the summary of how much income the business has made over a specific time frame. The number is found by taking the total operating expenses and deducting them from gross profit.
6. Taxes
   • Here is where a business lists all of the taxes it owes for the period, no matter where the taxes come from (i.e. local, federal or state/provincial).
7. Net Income
   • After all taxes are paid, this is the number that shows how much the business profited.

Next: How To Create an Income Statement

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