What is an Income Statement, and What Should it Contain?

The income statement, also known as the profit and loss statement, is a financial report that, based on a certain period, shows in detail the income obtained, the expenses at the time they occur, and, as a consequence. The profit or loss generated through the company in said time to analyze this information and make business decisions based on this.

Its financial statement gives you a panoramic view of the company’s behaviour and whether it has generated profits. In simple terms, this report is handy for you as an entrepreneur since it helps you know if your company is selling. How much it is selling, how expenses are being managed and by knowing this, you will be able to tell with certainty if you are generating profits.

Structure of Income Statement

The structure of an income statement is a group as follows: revenues, costs, and expenses. The report is structured based on these three main items.

The main income statement accounts are as follows:

Sales

This data is the first that appears in the income statement. It must correspond to sales revenue in the given period.

Cost Of Sales

This concept refers to the amount that the selling item costs the company.

Profit or Gross Margin

It is the difference between sales and the cost of sales. It is an indicator of how much is earne in gross terms with the product, that is if there were no other expenses, the comparison of the sale price against what it costs to produce or acquire it, as the case may be.

Operating Expenses

This item includes all those expenses that are directly involved with the company’s operation. Some examples are services such as electricity, water, rent, salaries, etc.

Profit over Flow

It is a financial indicator that measures the profits or profit that a company obtains without considering financial expenses. Taxes and other accounting expenses that do not imply an outflow of real money from the company, such as amortizations and depreciations.

Depreciation and Amortization

These are amounts applied annually to reduce the book value of tangible assets that the company uses to carry out its operations (fixed assets), such as a company’s transportation equipment.

Operating Profit

It refers to the difference obtained by subtracting depreciation and amortization from EBITDA. It indicates the profit or loss of the company based on its productive activities.

What Should an Income Statement Contain?

The income statement pursues a clear objective: to determine the profit or loss of a company. To fulfil that purpose, it must contain the following:

Income

The definition of the International Financial Reporting Standards (IFRS), cited by the tax specialist Pablo Calderón is an exciting document on tax expenditures. Income refers to “the economic benefits obtained during the accounting period in income. Increases in the value of assets or outflows/reductions in liabilities. That give rise to increases in equity, other than contributions from shareholders”.

They are the resources that your business obtains as consideration for the sale of goods, provision of services or execution of other activities. In addition, and it is worth clarifying, the contributions of owners or partners are not part of the income since the company must return them over time.

In that sense, you can classify them into:

Operating Income

They refer to the income that your business obtains for executing its mission objective, that is, what they pay you to sell a product or provide a service. For example, at a veterinarian, payments for consultations and surgeries would fall into this income category.

Non-Operating Income

They correspond to all the values ​​coming from activities other than those of the missionary object of your business. For example, dividends, commissions, rental income, financial returns, etc.

Remember that income is of a credit nature. Therefore, you should always record them in the “Credit” unless they require correcting an error or record adjustments at the end of the secretarial period, cases in which they will be of a “Debit” nature.

Expenses

These are the disbursements of resources that your company makes for administration, marketing, research, financing and others necessary to put a product or service in a position to be sold or used.

Consequently, you can classify them into the following categories:

Administrative Operating Expenses

All disbursements related to the administrative tasks of your business belong to this category. For example, payments for payroll (except sales), rental of administrative facilities and transportation of merchandise.

Sales Operating Expenses

These are all disbursements related to the sales area, such as remuneration to salespeople and telephone bills used for telesales tasks.

Non-Operating Expenses

They refer to the disbursements made by your business to finance activities other than those of its mission objective, that is, for reasons that have nothing to do. With the regular operation of the company. For example, reorganization or expansion projects, fines to pay for the loss of a lawsuit or. What you must spend due to obsolescence of specific equipment.

Costs

They should not be confused with expenses. The costs correspond to the disbursements of resources that your company makes to acquire, produce or offer a good or service from which you expect to obtain or obtain an income or economic benefit.

In any case, recording costs, expenses and income is to determine gross profit, net profit. Operating profit or profit before taxes. As is logical, the idea is that they present a positive balance, whose perfect percentage will depend on the industry to which your business belongs.

Explanatory notes

These are the clarifications that must appear at the end of any financial statement to clear up doubts and present details about the results of the report.

It point is quite important, since the true value of the income statement -as of any financial report. Lies in a deep analysis that allows us to fully understand the number and detect weaknesses and strengths in operational and non-operational activities.

Conclusion

An income statement or income and loss account is one of a company’s financial statements and shows. The company’s proceeds and expenses during a specific period. It indicates how the gains are transforme into the net income or net profit.