To prepare an income statement, you will need to create a trial balance report, determine your income, calculate cost of goods sold, calculate gross profit, include operating expenses, calculate your income, include income taxes, determine the net profit and finally wrap your income statement with the details of the business and the reporting period.
In case you are struggling to find the time to prepare your own income statement from the beginning, you don't have to worry because a free invoice statement template is the perfect solution. You can also outsource your accounting services to an experienced accounting firm to help handle your books.
An Income statement, also known as profit and loss account is an important part of financial statement. It shows how much profit a business made during a specific reporting period and the amount of expenses incurred while earning revenue. Other financial statements include balance sheet and cashflow statement. You can also see how to prepare a balance sheet
The income statement focuses on four key elements: income, expenses, profits and losses. It does not discriminate cash and non-cash receipts (cash sales versus credit sales) or cash payments/disbursements versus non-cash (cash purchases versus credit purchases)
How to Write an Income Statement
The best way to determine the amount of revenue your business has generated over a period is to create an income statement alongside other financial statements. If you want to write financial statements and report the profit or loss made by your small business over a given period, the following steps will show you how to prepare an income statement for a beginner.
1. Choose a Reporting Period to cover
The first step in preparing a profit and loss statement is to choose the reference period covered by the report. Typically, companies present their income statement on an annual, quarterly or monthly basis. However, small businesses are not as heavily regulated in their financial reporting. Creating a monthly income statement can show you trends in your profits and expenses. This information can help you make business decisions to make your business more efficient and profitable.
2. Create a Trial Balance Report
To create your company's income statement, you will need to extract a standard trial balance report. A trial balance is a list of credit and debit balances which are extracted from the ledger. The rules of trial balance state that all business assets must be debited or have debit balance, all business liabilities must be credited or have credit balance, all business income must be credited or have credit balance, all business expenses must be debited or have debit balance.
You can easily generate trial balance through your cloud-based accounting software. Trial balance reports are internal documents used by internal users of accounting that list the closing balance for each general ledger account for a specific reporting period. Creating trial balance is a crucial part of preparing an income statement because this is where a business collects information for account balances. It will help you with all the final balance figures you need to prepare an income statement.
3. Calculate Your Company's Revenue
Next, you will need to calculate the total turnover of your business for the reference period. Your income includes all the money you earned for your services during the reporting period, even if you have not yet received all payments. Add up all the trial balance report and enter the total amount in the income statement.
4. Determine Cost of Goods Sold
Cost of goods sold includes direct labor, materials, and overhead costs that you incurred to manufacture your goods or provide your services. Summarize all of the cost of goods sold items on your trial balance and report the total cost of goods sold on the income statement, directly below the income item.
5. Calculate the Gross profit
To determine your company's gross profit or income, deduct the cost of goods sold from the total revenue on your income statement. This calculation will help you ascertain the gross profit for the period.
6. Include Operating Expenses
Add up all operating expenses listed in the trial balance report. Each expense line should be rechecked to ensure you have the correct numbers. Enter the total amount in the income statement as an administrative and sales expense item. It sits directly under the gross profit line
7. Calculate Your Income
To calculate your income, deduct the total selling and administrative costs from the gross profit. This will give you the pre-tax income. Enter the amount at the bottom of the profit and loss statement.
8. Include Income Taxes
To calculate income tax, multiply the applicable state tax rate by the amount of pre-tax income generated. Add it to your income statement, under your pre-tax income amount.
9. Calculate Net Income
To determine the net income of your business, subtract income tax from pre-tax income. Enter the number in the last line of your income statement. This will give you insight into the performance of your business, allowing you to see how profitable you have been.
10. Finalize the Income Statement
To finalize your income statement, add a header to the report so that users can know what it is. Add the details of your business and the reporting period it covered. Example: ABC Limited, Income statement for the year ended, 31st December, 2020. With all the data you entered, you have now created a correct income statement. This will give you a future understanding of the definition of income statement which will be very helpful for you and your business practice.
Income Statement Example
This income statement example created by Trendingaccounting.com can give you a better understanding of the items that are reported on an income statement, the format and how the data should be organized:
Difference Between a Balance Sheet and Income Statement
There are some key differences between the balance sheet and the income statement of a business. They include the following:
While the income statement reports monetary activity for a specific reference period, typically a month, quarter, or year, the balance sheet reports financial activity over a specific period, for an instant view of a company's finances.
2. Information reported
The income statement reports the income and expenses of a business and, ultimately, the amount of profit or loss it has generated over a specific time, while a balance sheet reports the assets, liabilities and net worth of a business.
The income statement is used to report the overall results of the financial performance of a company, or the amount of profit it generates. The balance sheet is used to analyze if a company has sufficient liquidity to cover its financial obligations.
To prepare an income statement for your business, you need to analyze and report their income, expenses and the resulting profit or loss for a specific reporting period. Your reporting period can be either monthly, quarterly or annual depending on your company's need.
If you run a business and can't afford to hire a full-time accountant to help you handle your books, then you can outsource your accounting services to any reputable accounting firm near you. So you can focus more on ways to manage your business and improve productivity.
To get the closest reputable accounting firm near you to help prepare your financial statements, just type "accounting firm near me" or "accountant near me" on any search engine platform like Google, Bing, etc and the closest company will appear.