Running a successful company is not all glory and money, as many people might think. It requires hours of labour, sleepless nights, and a steady stream of sweat and blood. No matter what your business is—small, big, online, offline—managing every aspect of it is a stressful feat. As an owner, it is your responsibility to know every bit of organizational operations you have, including the accounting and financial side of it especially your income statement.
As with large companies, you may hire CPAs to handle your company’s financial statement. However, as an entrepreneur, you need to understand all the business terms and numbers written on your financial declaration. It is vital to know where your money goes every fiscal period—your debts, filed taxes, stock inventory, income statement, and accounts receivables.
Having this knowledge allows you to create profit plans for your business and plan a road map for its future. It also shows how your business grows every year and what actionable strategies you must apply based on your yearly earnings.
One of the three important financial statements you must focus on is your income statement. Written or printed on a single piece of paper, an income statement tells a lot about your current and future business direction.
What Is An Income Statement?
Also known as the profit and loss statement, an income statement is a calculated numerical presentation of a company’s revenue and expenses over a specific accounting period. It shows the overall financial result and performance of a company. It is one of the most vital financial statements an enterprise needs to file and release, the other two being the balance sheet and statement of cash flows.
An income statement gives you a detailed result of all business operations done within a specified period, whereas a balance sheet only presents the conclusion. It tells you where a company’s resources came from and where it went during operations. Every company is legally required to file, release, and submit a P&L declaration to the Securities and Exchange Commission. Other uses of a profit and loss declaration are:
- Indicate the amount of profit generated from existing assets
- Keep track of profitable operations
- Monitor the fluctuating sales rate
- Spot market and product difficulties
- Spot other financial weaknesses
What Is Inside An Income Statement?
A profit and loss statement consists of four essential items—gains, losses, revenue, and expenses.
Revenue and Gain
These are income earned through the sale of an enterprise’s primary and secondary goods and services.
- Operating revenue – is the revenue or sales related to the day-to-day operations of a company. It is the income from the sale of a product or an exchange of service (for service-based business). An enterprise’s primary activities do not include the purchase of old inventory or client debt payment.
- Non-operating revenue – unlike its counterpart, non-operating revenue is sales associated with the secondary operations of a business. It includes dividend income, gains from foreign exchange, profits from investment, and asset write-downs.
- Gains – these are company transactions (sale) that happen outside the normal operations of a business. It includes a high-value or long-term asset sold by the enterprise and one-time sale activities outside the company.
Expenses and Losses
Expenses are the amount of money used in the production process of the business’s primary operations. While losses pertain to the money lost from secondary means.
- Primary Activity Expenses – the amount of expenditure used to fund the day-to-day operation of a business, which in turn will provide revenue. It includes selling, cost of goods sold, general and administrative expenses, amortization, depreciation, and research expenses. Employee wages and commissions, as well as utility expenses, belong to this group.
- Secondary Activity Expenses pertain to all non-business related expenses such as loan payments, income tax, and interest expense.
- Losses as Expenses – are cash outflows that happen outside the business.
Company accountants or financial officers are the ones who compute profit and loss statements. First, they will choose a reporting period that the declaration will cover. Then, they will generate a standard trial balance report. Next is the calculations. They will determine and calculate the revenue, gross margin, cost of goods sold, income, income taxes, operating expenses, and net income. Lastly, they will finalize the report through a cloud-based software; file and then submit it to the company and other agencies. Still, seeking advice from a chartered accountant who is well-versed in profit first systems might help you improve your accounting process even better, especially where income is concerned. If you want to know more about this, drop me a message so we can sit down and talk about it! Subscribers can also access all of our social media channels and our YouTube channel.