Introduction to Income Statement

Introduction to Income Statement

The Income statement is one of the most important part of financial reporting or financial statements of an Organization. This is the statement that reflects the profits and Losses Company has made over a specified period of time. The basic concept of Income statement is that it takes into account all the revenues company has made and then subtracts all the expenses company incurred over the same period of time to reach at the profit and loss of the company.

Income statement is one of the three core financial statements of the company. These include

  1. Balance Sheet or Statement of Financial Position
  2. Income Statement
  3. Statement of Changes in Equity

Some of the elements that are part of Income Statement are Revenues, Expenses and Gross Profit etc.

Introduction to Income Statement

Income Statement can be prepared for different time period depending on the requirement of any organization however generally companies prepare them on monthly, quarterly and annual basis to keep strict monitoring of financial results. Below is the example of Income Statement

Sample Income Statement

Components of Income Statement:

Income statement for different companies varies since nature of revenue and expenses for each company is different. However some of the common elements of Income Statement are:

  • Revenues/Sales

Revenue or Sales is the first element of Income Statement. In this total revenue or sale of company are added to reflect total amount of sales or Revenue Company has made over the period of time. Please note that Revenue reported here is the Gross Revenue.

  • Cost of Goods Sold (COGS)

Cost of Goods Sold or Cost of sales is the total direct costs that company has incurred in generating the total Revenues reported above. Please note here that this will include only direct costs as indirect costs are deduced in the below line items. Some of the common examples of direct costs are Direct Labor, Direct Material, Direct parts consumed in production and other similar Direct Costs.

  • Gross Profit

Gross Profit is calculated by the company by subtracting Cost of Goods Sold from Total Revenues. This is the amount of profit company is making after considering only direct costs. Such information is very useful while decision making about production costs.

  • General and Admin Expenses

This part of income statement contains all the indirect expenses company has incurred over the period of time. Some of the examples of indirect costs are salaries and wages of staff, utilities, Rent of building, travel expenses and depreciation and amortization etc.

  • Depreciation and Amortization Expenses

Depreciation and Amortization are a concept of accounting whereby accountant allocate the cost of capital assets over their useful life. These are non-cash expenses but vital part of Income statement.

  • Operating Income before Interest and Tax (EBIT)

This can be defined as the actual profit made by the company from operations without considering Interests, non-operating expenses and taxes.

  • Interest Income and Expense

Interest expenses and income is generally reported separate by the companies to know how much expenses they are bearing on the loan capital utilized and how much they are making from spare capital.

  • Earning Before Taxes (EBT)

This is calculated by subtracting Interest Income and Expenses from Operating Income before Interest and taxes.

  • Income Taxes

This reflects the amount of income tax company is liable based on the income or losses it is generating and depends on the tax law of different countries.

  • Net Income

This is the last element of Income statement this is the actual profit company is making after deducting all types of expenses from total Income.

Real Example of Income Statement Below:

Example of Income Statement

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