Starting a small business means being both an investor and an accountant. Managing your finances is part of the job. Even if you have a Certified Public Accountant (CPA), it’s good to know what reports and statements are prepared for your business.
An income statement, also known as an income statement, is one such report.
What is an income statement?
An income statement is a financial statement that summarizes your business’s income, costs, and expenses incurred during a specified period (for example, a month, quarter, or year) and includes net income.
If your business is public, financial statements that include an income statement, balance sheet, statement of cash flows, and statement of equity are included in the quarterly and annual reports that you need to file for your business. Financial statements allow you and your shareholders to see how the business is performing, providing a complete financial picture of your business.
Benefits of an income statement
There are many advantages to preparing and viewing an income statement, including:
● Get an overview of your company’s current profit for a period: With an income statement, you can immediately see if your business is making a profit. When determining expenses, look for ways to reduce your business costs or increase its income.
● Compare your current profits and losses to past years: Is your business growing? Are you increasing your profits? If so, how fast? It helps to compare your current and past income statements to see where you can improve.
● Attract investors: New and existing investors will want to consult periodic income statements to learn about your company’s financial performance.
You can ask your accountant to prepare an income statement for your business or you can create one yourself by following the steps below.
Gather what you need
Start by determining the period (eg month, quarter, year) for which you want to prepare your income statement and the format you want to follow.
To prepare your income statement, you will need to collect all financial transactions during this period, including:
- All sources of income; including sales, interest income, rental income and service charges and any reduction in sales, both returns and discounts.
- All expenses incurred such as purchases of materials and other assets, salaries (total compensation), interest charges on business loans, insurance, rent and taxes
Once your financial documents are in order, follow the steps below to prepare your income statement.
Note that expenses are recognized when they are incurred, not when they are paid. Likewise, income is recognized when it is earned, not when cash is received.
Step 1: Determine the income for your business.
Add up all forms of earned income. Get all sales and returns from your general ledger, for the time period you choose (for example, a quarter).
Step 2: Calculate the cost of goods sold for your business.
Your total cost of goods sold can be calculated by taking your starting inventory, adding all purchases, freight charges, direct labor costs, and a portion of indirect expenses, and subtracting your ending inventory.
Step 3: Calculate the gross profit / gross loss of your business.
Gross profit / loss is calculated by subtracting cost of goods sold (step 2) from total income (step 1).
Step 4: Determine the operating expenses of your business.
Calculate the operating expenses of your business by totaling all indirect business costs, such as:
- General administrative costs
- To rent
- To travel
- Depreciation and amortization
Step 5: Calculate your company’s operating profit
Calculate your business operating profit / loss by subtracting operating expenses (step 4) from gross profit / loss (step 3).
Step 6: Determine any other income, expense, interest income, and interest expense.
Other income and expenses generally include non-recurring items, for example, a gain or loss from the sale of an asset (for example, equipment).
Interest income includes any interest receivable, for example, on company cash held in bank accounts.
Interest expense includes all interest payable on debts of the business, such as a business loan.
Step 7: Calculate your business income tax expense.
The tax charge for the period is calculated by multiplying the taxable result by the tax rate.
Step 8: Calculate the bottom line of your business.
To calculate net profit, also called after-tax profit, take your operating profit (step 5) and add other income and interest income (step 6) and subtract other expense and interest expense (step 6) and tax charges (step 7).
The bottom line is commonly referred to as the “bottom line” of a business and is an indicator of the profitability of a business. Calculating net profit is the last step in preparing your income statement.
Now that you know how to prepare an income statement, find examples and templates online to help you get started.
Once you’ve established your income statement, use it to identify areas where you can improve the financial health of your business. Meet with your Chase Commercial Banker to determine if you are ready to open a business bank account, if you need financing, or if you are ready to apply for a business credit card.