The income statement (Profit & Loss report) is a financial report that tells management, self-employed or shareholders how the business is performing in terms of revenue and where the money is being spent. The income statement is important to have on a monthly, quarterly or yearly basis in order to make important decision. Not only will this report help the business owner be organized but in tax season there won’t be a need to hassle over all your receipts and invoices since you already have that one report that can answer the questions to your company’s tax return. If you’re self-employed that would be Form 1040 Schedule C, if you’re in a partnership then its Form 1065 or if you’re a corporation then Form 1120 or 1120s.
There are three sections to the Income Statement or P&L report:
SECTION 1: REVENUE
A) Sales. This shows how much the business has sold of its products/services .
B) Cost of Goods Sold. This includes all the costs that are directly related in the process of generating revenue:
- Cost of merchandise
- Freight & delivery
- Additional fees in acquiring product for resell.
C) Gross profit. The differences between sales and “COGS”. The gross profit should be a positive number, unless you are selling your product/service for less than its costs.
Example: Sales – COGS = Gross Profit.
Special Note: Learning to manage your inventory is important. Check out our previous article on controlling inventories costs.
SECTION 2: EXPENSES
Administrative and operating. This will include most expenses that keeps your business running, EXCEPT for loan repayments, owner draw and “other” payments that are reported in another report called the “Balance Sheet”.
Free QuickBooks Template. Download this template for a list of most common business expenses and a guide to creating your own income statement.
SECTION 3: NET INCOME
The difference between Gross Profit and Expenses.
Net income represents the profit generated during a specific time period that the business has operated. If net income is negative, this means that the expenses of the business are more than the generated sales. Again, if the business owner or manger is not looking at the income statement, he/she will have no idea that they are losing money despite their “great” sales.