Income Statement Basics 101
The Income Statement, or Profit and Loss (P&L), shows the financial performance of a business over a specific period of time. This financial statement is used to identify areas of strength or weakness in the revenue coming into and the expenses flowing out of the business.
Sections of the Income Statement
The Revenue section of the P&L shows all income dollars coming into the business, over a specified period of time. This part of the Profit and Loss can be as detailed as management wants. For example, if there are multiple locations of the business, management would want to be able to see each store's revenue number, in addition to all stores in total for the period. It can also include Contra Revenue accounts such as discounts or returns. There is a multitude of ways to set up the Revenue section, it really just depends upon what management wants to focus on.
The Cost of Goods Sold (COGS) section shows all expenses incurred by the business that are directly related to revenue generation. Retail businesses purchase products that they resell to the public or other businesses. Those purchases are what are considered COGS as they are directly used to create the revenue for the business. Other costs associated with this category can be; labor, packaging, freight, and other COGS.
A company's Gross Profit measures how much money was made after the Cost of Goods Sold is taken from the Revenue made, over a specific period of time.
Operating Expenses are all other costs that are incurred in order to run the company. Payroll, Advertising, Offices Expenses, and and many other potential expense accounts can make up this section of the Income Statement.
Other Income & Expenses make up the last portion of Profit and Loss. The example above does not contain this section, but this is where income not related to operations, depreciation, amortization, interest, and other expenses that are incurred outside of normal business activities, are listed.
Net Income/(Loss) is the end result of a specified period of time, taking all Revenue and Expenses into consideration. Basically, this lets management know if any profit was made for the period. Interestingly, this result flows into the Equity section of the Balance Sheet as the Current Year Earnings!
This covers the Income Statement basics. If you ever have any questions about Financial Statements or any other Accounting questions, please feel free to contact us.
Blue Collar CFO