What is an income statement?

Income statement definition and meaning

An income statement is often referred to as a profit and loss (P&L) statement and shows a company’s revenue, cost of goods sold (COGS), gross profit, expenses, taxes, and net profit over a specific period. It’s used to reveal gains or losses, typically over the course of a quarter or year.

What is the main purpose of an income statement?

Put simply, an income statement is a snapshot of how an organization is performing and employers can use it to::

• Track profitability: An income statement allows organizations to quickly determine whether they’re profitable. They’ll know whether to continue doing what they’re doing or make changes to boost their profit margins.
• Understand profit drivers: An income statement will show if revenue growth or lower expenses led to profits. If revenue growth is an issue, the company may invest more effort in marketing or product development. If expenses are too high, looking for places to cut back may be worthwhile.
• Forecast: Employers can use an income statement to predict how they may perform in a given quarter or year. This process, known as forecasting, can help them create attainable goals.

What are the three parts of an income statement?

An income statement is made up of three main components, including:

• Revenue: Revenue shows how much money a company earned during a set period. It may include operating revenue, which is derived from core business activities, such as goods or services as well as non-operating revenue, which comes from secondary sources, like rental income or investment interest. Revenue on an income statement is usually found on the top line of the report.
• Expenses: Expenses refer to the costs a company incurred in order to generate revenue. They are often listed as the second line item of an income statement. Expenses usually include:

1. 1. Cost of goods sold (COGS): COGS refers to how much it costs to produce goods and services. It may include labor, raw materials, and production-related overhead.
   2. Selling, general, and administrative Expenses (SG&A): SG&A expenses are the costs that come with operating a company but are not directly related to the production of goods and services. They may include rent, equipment, advertising, and salaries.
   3. Depreciation and amortization: Depreciation occurs when a company loses the value of its tangible fixed assets such as equipment and machinery. Amortization is similar but involves the reduced value of intangible assets like goodwill.

• Net Income: Net income is the total a company collects after they recieve all their revenues and pay all their expenses. While a positive net income demonstrates profitability and stability, a negative number indicates a loss. Also known as net profit, net income is typically the bottom line of an income statement.