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What is an income statement?
An income statement (also known as a profit and loss or P&L statement) documents a business' revenue and expenses. Along with a balance sheet, cash flow statement and statement of owner's equity, it's one of the four major financial statements that a business uses to track overall financial health. The income statement tracks the efficiency of a business and can serve as a comparative document to peers and competitors.
Why should you create an income statement?
The income statement is an important tool to showcase the overall profit and loss of a company during a specific period of reporting. It effectively conveys profitability and can be used by company management to indicate areas of strength and weakness and help them better understand where their business stands financially. Do they have money left over to reinvest or make additional purchases, or do they need to cut back spending in certain areas to help offset losses? The income statement can also be used to make key changes to the company's financial structure in order to adapt to expanding competition and the ever-changing financial landscape. Potential investors in a business may also use it to ascertain the general viability of that business.
How is an income statement structured?
All income statements are structured around total net income, which is found by simply subtracting costs (expenses and losses) from income (revenue and gains) to determine profit (income is more than costs) or net losses (income is less than costs). Income statements are structured as either single-step statements or multi-step statements.
- Single-step statements provide a streamlined and simplified view of a company's total net income and are often used by small businesses. The key aspect here is bottom line net income—as shown in the example below
- Multi-step statements provide a more comprehensive view of the company's total income. Preferred by larger companies, these statements will capture each contributing item in detail as sub-bullets within the categories of expenses, losses, revenue and gains, including total operational or non-operational costs.