Income Statement Definition, Explanation and Examples

December 16, 2020

financial position

A single-step income statement is one of the formats for profit & loss statements that involves just one step to determine the net income of your business. This step involves subtracting expenses and losses from incomes and gains. As the name suggests, it is a single-step income statement that includes one subtraction, that is, subtracting the sum of expenses and losses from the sum of revenues and gains. Furthermore, the Multi-Step Income Statement clearly states the operating income of your business that showcases how much profit your business has earned from its core business activities during a specific accounting period. Accordingly, such a statement showcases your company’s revenues, costs, gross profit, selling, administrative expenses, other income and expenses, taxes, and net profit in a standardised format. Nonoperating revenues or income, nonoperating expenses, gains, and losses result from activities outside of the company’s main business activities.

  • Therefore, to prepare the income statement for your business, you need to report the revenues, expenses, and subsequent profits or losses within a specific accounting period.
  • This format shows the results of more than one reporting period in a set of adjacent columns.
  • To finalize your income statement, add a header to the report identifying it as an income statement.
  • Here’s a sample income statement of company ABC for the year ending 31st December 2020 and 31st December 2021.
  • Vertical analysis refers to the method of financial analysis where each line item is listed as a percentage of a base figure within the statement.
  • Format historical data input using a specific format in order to be able to differentiate between hard-coded data and calculated data.

(IAS 1.104) The major exclusive of costs of goods sold, are classified as operating expenses. These represent the resources expended, except for inventory purchases, in generating the revenue for the period. Expenses often are divided into two broad sub classifications selling expenses and administrative expenses.


FreshBooks provides an easy-to-follow accounting formula to make sure that you’re calculating the right amounts and creating an accurate income statement. Depreciation is the process of deducting the total cost of something expensive purchased for your business. However, instead of doing it all in one tax year, you write off parts of it over time. When you depreciate assets, you can plan how much money is written off each year, giving you more control over your finances. How you calculate this figure will depend on whether or not you do cash or accrual accounting and how your company recognizes revenue, especially if you’re just calculating revenue for a single month. After revision to IAS 1 in 2003, the Standard is now using profit or loss for the year rather than net profit or loss or net income as the descriptive term for the bottom line of the income statement.

  • This calculation will give you the gross margin, or the gross amount earned from the sale of your goods and services.
  • This report is a prerequisite for preparing all financial reports as it contains the closing balances of all the ledger accounts on a specific date.
  • You must remember that to calculate gross profit, only variable costs are taken into consideration, meaning the costs that change with the change in the level of output.
  • Thus, the users of the balance sheet like investors and creditors get a fair idea of how effectively the management of the company uses its assets.
  • For example, if revenues and gains are worth $215,000, and Expenses and Losses are worth $77,000, the Net Income turns out to be $138,000.
  • The information is presented without change from the “as filed” financial reports submitted by each registrant.

It includes material costs, direct labour, and overhead costs , and excludes operating costs such as selling, administrative, advertising or R&D, etc. Everything below Operating Income is not related to the ongoing operation of the business – such as non-operating expenses, provision for income taxes (i.e., future taxes), and equity-method investment activity , net of tax. This statement is a great place to begin a financial model, as it requires the least amount of information from the balance sheet and cash flow statement. Thus, in terms of information, the income statement is a predecessor to the other two core statements. The OECD Banking statistics database includes data from 1979 on classification of bank assets and liabilities, income statement and balance sheet and structure of the financial system for OECD countries. The amount by which assets exceed liabilities is listed as total shareholders’ equity, and this represents the net worth of a company, or the book value of the stock.

Income Statement Example

To finalize your income statement, add a header to the report identifying it as an income statement. Add your business details and the reporting period covered by the income statement.

More than one company, especially young and growing ones, have looked like superstars on their income statements, but have been forced to cease operations for lack of cash. Calculate operating income, which is income your business entity is able to earn from normal business operations. This is calculated by subtracting operating expenses from the gross profit. An income statement is one of your business’s most important financial statements and showcases the profit earned or losses incurred by your business during an accounting period.

How to Read & Understand an Income Statement

A company which reports any of the irregular items must also report EPS for these items either in the statement or in the notes. For example, valuation of inventories using LIFO instead of weighted average method. The changes should be applied retrospectively and shown as adjustments to the beginning balance of affected components in Equity. Revenue – Cash inflows or other enhancements of assets of an entity during a period from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major operations.

This contrasts with the balance sheet, which represents a single moment in time. Businesses often have other expenses that are unique to their industry. The income statement may have minor variations between different companies, as expenses and income will be dependent on the type of operations or business conducted. However, there are several generic line items that are commonly seen in any income statement.


It a summary of revenues, costs, and expenses incurred by your business during a specific accounting period. This reading has presented the elements of income statement analysis. A company’s net income and its components (e.g., gross margin, operating earnings, and pretax earnings) are critical inputs into both the equity and credit analysis processes. Equity analysts are interested in earnings because equity markets often reward relatively high- or low-earnings growth companies with above-average or below-average valuations, respectively.