How to Prepare an Income Statement
An income statement can help you better understand the overall financial health of your business. Here’s how to prepare an income statement.
What is an income statement?
An income statement is a kind of financial report that lists all of the income and outgoings for a certain time period for a business, division, team, or activity. Most accounting software makes it simple to generate the reports by allowing users to choose particular items to be included or omitted based on client, payee, category, or different tags.
Income statements also provide the organization’s net income (revenue minus costs) for a certain time period in addition to displaying revenue and expenses by category.
Users may often choose the categories of revenue and costs to be included in accounting software. This enables managers to alter reports to get the most precise and analytical understanding of the financial state of their firm.
When and why are income statements used?
Company managers often utilise income statements for reporting requirements. And, depending on the specifics of a firm or business owner, they may also be utilised for other things like appraising a corporation or examining prospective tax planning techniques.
Other scenarios in which income statements are used include:
examining the financial statements of the firm
Making managerial choices, such as recruiting, and considering the purchase of additional assets
Income statements may be quite beneficial in many situations, but there are also situations when individuals mistakenly believe they are being utilised when they aren’t.
Most importantly, income statements aren’t actually required when filing taxes. Owners or managers of businesses may use them to gain a broad idea of how much they could owe, but tax filings are made using customised forms rather than classified revenue statements. These submissions must be supported by independent evidence, such as bank statements.
Therefore, rather than internal accounting reports like income statements, accountants often go straight to account statements when preparing tax filings.
How to write an income statement
Income statements may be altered to meet the unique requirements of a business, group, division, or management. To organise revenue and costs for the purpose of creating an income statement, there is a fundamental procedure that must be followed. Otherwise, managers cannot be certain to gather the appropriate data in the appropriate manner to provide insights into an organization’s profitability.
Following are the four phases in creating an income statement:
Determine the sources of income and profits (from investments, for example)
Determine the costs and losses sustained by the firm during that time.
Combine earnings, costs, profits, and losses according to the category, payee, or another aspect.
To calculate the company’s net income for the relevant time, add up revenue, costs, profits, and losses.
Accounting software makes it much simpler to create an income statement. By choosing the kind of accounting report they want to create and then choosing the revenue and cost categories they want to include or omit from their report, users of the majority of commercial accounting software may quickly and easily construct income statements.
Learn how to create an invoice in this related article.
What is included in an income statement?
A company’s revenue and costs, as well as any times when it makes or loses money without physically exchanging money, are all included in an income statement (such as the value of business assets rising or falling). In essence, an income statement contains all of the elements that, when totaled over a certain time period, represent a company’s net income.
An income statement includes the following:
*Cash flow by category
*Gains for the business on asset value
*Losses sustained at the same time frame
Managers may compute the net income for the period covered from these using accounting software, which is also included on the statement. Statements may also have sporadic totals at various periods (operating revenue, income before taxes, etc.). Net income as a proportion of gross revenue may also be included in the statements (profit margin).