What is an income statement?

1 min readLast updated October 5, 2023by Rachel Carey

A business is only as good as its underlying finances. An income statement gives you a really clear indication of how the money side of things is faring. It tells you how much money you’re bringing in and how much you’re spending each month or quarter, so you can decide the best way to turn a stronger profit.

What is an income statement? 

All companies have to produce three financial statements for a specific reporting period. One of these is the income statement. It shows the money that’s come into the business and the money that’s gone out, which is why it’s also often called the profit and loss (P&L) statement. 

Along with an income statement, businesses must also prepare a balance sheet and cash flow statement. 

Why are income statements important? 

An income statement is one of the clearest ways to show whether or not a business is making any money. It helps gauge the financial health of the business and guide important decisions.  

Both internal and external stakeholders will be keen to see an income statement. Internal stakeholders, such as the owner and board members, will use the information to set a strategy that they think will turn a profit. External stakeholders include shareholders, investors and lenders, who want to ensure the business is in a good financial position before handing over money. Other external viewers could be competitors who want to know how you invest money to grow your business and guide their decisions.   

Here are some of the ways that an income statement will be used: 

  • A regular guide – income statements are produced more frequently than annual reports, which gives you an indication of your profit or loss each quarter or even each month. Having more regular insights can help you change how you do things before they become a more serious problem. You might also spot patterns in where most of your money comes from, giving you focus for your strategy. 

  • Planning ahead – with regular insights into how much you spend on each item, you can plan your resources for the coming months. You may even find opportunities to reduce expenditure. 

  • Getting finance – an income statement is one of the crucial reports that investors and lenders will use to decide how risky it is to give you money. Put simply, they want to know that you have enough breathing space in your finances to repay a loan and pay dividends to shareholders. If you’re considering selling the business, potential acquirers want to see a track record of healthy income statements to know they’re buying an entity that will make them money. 

What is included in an income statement? 

The entries you include on an income statement fall into four categories: revenue, expenditure, losses, and gains. Revenue covers all the income the business has generated. Expenditure covers all the payments you’ve made. Losses and gains are on top of revenue and expenditure – losses refer to additional money lost, while gains cover additional money earned. They could be for things like the sale of premises or the cost of a lawsuit. 

Although businesses have their own categories for income statements that reflect their activities, they generally follow this structure: 

Revenue – money brought into the business from sales (sometimes called sales). If money comes in from several activities, there may be a few headings for different revenue streams and a total figure.  

Cost of Goods Sold (COGS) – direct costs of making the revenue happen, such as the costs of labor and materials. It doesn’t cover overheads, which are ongoing business expenses unrelated to delivering the good or service. 

Gross profit – the profit once you’ve accounted for the cost incurred to make it. Specifically, it’s the revenue minus the COGS. 

General expenses – expenses for the business, like wages, rent, supplies, insurance, travel expenses, and, sometimes, depreciation. These costs are generally fixed.  

Marketing expenses – the cost of things like promotions and advertising. Businesses often separate these because they’re all similar and directly linked to sales. 

Depreciation – some assets lose value over time, like most cars. Items in this section come under Property, Plant, and Equipment (PP&E). Accountants spread out the cost of these through income statements. Amortization is similar, but it covers intangible assets (things like trademarks), and it spreads the cost of those out over the time it is considered useful. 

Interest – the cost of interest for any loans the business holds. 

EBT – stands for Earnings Before Tax. It is calculated by subtracting all expenses from revenue before paying tax. Some businesses apply EBIT (Earnings Before Interest and Tax) or EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization).  

Taxes – the various taxes that businesses pay. 

Net income – the money earned after paying all expenses. 

How to prepare an income statement 

Before creating your income statement, deciding how often you want to report on the figures is important. Monthly statements can help you quickly identify developing trends, while quarterly statements may be more manageable. 

Once you’ve set a reporting period, using a template is the easiest way to prepare an income statement. You can find them online for free from different accounting providers, or you can set up your own using a spreadsheet app. It can help to use historical data (income information from previous months) to establish the template, so you can easily see what goes where and ensure the formulas are correct. In addition, some businesses find it helpful to have different font colors to determine entries that stay the same (such as pre-calculated depreciation and amortization values) and ones that can change.  

Once you have your template, you input the relevant figures, careful not to change the underlying formulas. 

Although straightforward in principle, an income statement can be complicated to put together. It requires keeping a close eye on all revenue and expenses. Not only that, but you need to decide the most appropriate entries and reporting period for your business and goals. An accountant can advise you on the best approach and take care of the entries, helping you keep on top of everything. Search our directory to find an accountant or financial advisor who can help you manage your finances.

Senior Content Writer

Rachel Carey

Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.