Table of Contents
What is an Income Statement
Components of an Income Statement
What is an Income Statement
An income statement is one of the three financial statements that startups use to assess their business. The other two being the balance sheet and the cash flow statement. In this post, we'll be taking a high-level look at income statements - what they are, why they're important, and how to read them.
An income statement, also sometimes called a Profit & Loss (P&L) Statement, is a financial statement that summarizes a company's revenue and expenses over a given period of time (usually quarterly or annually). The purpose of an income statement is to give stakeholders an idea of how profitable a company is.
Income statements have three main sections: revenue, expenses, and profit. Revenue is the money that a company brings in through its business activities. Expenses are the costs incurred by the company in order to generate that revenue. Profit is the difference between revenue and expenses.
Components of an Income Statement
An Income Statement is broken down into 3 main sections: Revenues, Expenses, and Profits. Let's take a look at each:
Revenue
Revenue can be further broken down into two categories: operational and non-operational. Operational revenue is generated from the company's core business activities. This could be sales of goods or services, interest on loans, or rental income. Non-operational revenue comes from sources outside of the company's normal business activities. This could be things like gains from the sale of assets or interest from investments.
Expenses
Expenses can also be divided into two categories: operational and non-operational. Operational expenses are those incurred in the course of running the business. This could include things like cost of goods sold, salaries, rent, utilities, and marketing expenses. Non-operational expenses are not directly related to the company's normal business activities. This could include things like interest on debt or losses from the sale of assets.
Profit
Profit is simply the difference between revenue and expenses. It can be further broken down into two categories: net profit and gross profit. Net profit is calculated by subtracting all expenses (both operational and non-operational) from total revenue. Gross profit is calculated by subtracting only operational expenses from total revenue.
In Summary
Income statements are one of the three key financial statements that startups use to assess their business. They give stakeholders an idea of how profitable a company is by summarizing its revenue and expenses over a given period of time. Income statements have three main sections: revenue, expenses, and profit; with each section further broken down into operational and non-operational items. Profit is simply the difference between revenue and expenses; it can be further broken down into net profit and gross profit. Now that you know the basics about income statements, you'll be able to read them with confidence!
