As your business grows, you’ll need to complete and submit certain documents to the IRS and state governing bodies for annual reports. One of these important documents is your income statement. Outside of required reporting, the income statement helps companies to understand their current business operations while providing insight for strategic decision-making.
Once you know how to read and assemble an income statement, you’ll be more equipped to understand the financial nuances of running your business.
What Is an Income Statement?
The income statement goes by many names. It may be referred to as a profit and loss (P&L) statement or a statement of earnings. These names provide descriptive clues as to what goes on an income statement and why it’s so valuable.
An income statement reports a company’s revenue, expenses, gains, losses, and net income over a period of time. Along with reporting the current numbers, an income statement might compare 1 period to another, illustrating changes between those periods.
What Goes on an Income Statement?
While some income statements are more complex than others, there are a few universal aspects to each that you should know. These elements provide the bones of your reporting and can help you to evaluate the health of your business.
- Net Sales: Otherwise known as sales or revenue, this number reports the value of the goods or services sold to customers. This number is the starting point to calculate profit margins and net income.
- Cost of Sales: Also known as the cost of goods sold (COGS), this includes the cost of materials, labor, and production expenses that went into creating the products and services for the company.
- Gains and Losses: This refers to any increase or decrease in the value of an asset or property. For example, growth in a company’s real estate investments or income from the sale of company assets would be considered gains.
- Net Income: This metric wraps up the whole report. It adds together the net sales and gains and then subtracts the cost of sales and losses. The result shows the company’s profitability.
With these numbers, an owner or manager can better understand the inner workings of their business.
Who Assembles the Income Statement?
The role of reporting falls to different people depending on the size of your business. If you only have a small staff or operate as a sole proprietor, the burden of assembling an income statement could fall on you. However, once your business grows to a point where you can take on a bookkeeper or accountant, this person can step in and develop your financial reports beyond just an income statement.
You may also decide to outsource financial services like completing an income statement. To do so, you could work with an accounting firm to organize your books and put together these reports or find a freelance accountant to assist.
Regardless of who completes your income statement, it’s important for you to familiarize yourself with income statements and other financial reports to help you gain more data and insight into your business.
If you plan to grow your company, creating and analyzing income statements will become increasingly important. One way to simplify the income reporting process is with a software system that streamlines your reporting. Consider using a tool like Sunrise, which can help you send invoices, import expenses, and ensure the accuracy of your reporting.