Write an Income Statement

An income statement is a key financial document in business. It shows the profitability of a company over a specific period of time. The following guide shows you how to prepare a simple multi-step income statement. A multi-step income statement separates operating income and expenses from non-operating items.

Steps

Setting Up Your Income Statement

  1. Choose a time period for your income statement. Income statements measure revenues and expenses during a certain period of time and are typically generated on a monthly, quarterly, or annual basis. [1]
    • Businesses that are publicly traded must generate income statements on quarterly and annual basis to file with the Securities and Exchange Commission.
    • Businesses also generate income statements on a periodic basis to identify business trends and evaluate financial results.
  2. Format the income statement header. At the top of the document, write the name of the company. On the line directly beneath the company name, write "Income Statement." On the next line, write the period of time that the income statement covers.
  3. Format the body of the income statement. Income statements have four distinct sections. [2]
    • The first section of the income statement calculates gross profit from sales revenue and cost of goods sold.
    • The second section calculates operating income from gross profit and operating expenses.
    • The third section calculates non-operating income based on non-operating revenues and expenses.
    • The fourth section calculates net income using all revenue and expense information.

Preparing the Gross Profit Section

  1. Write "Sales revenue" below the income statement header. List sales revenue for the period.
    • Sales revenue includes all revenue earned from the sale of goods and services, regardless of whether or not the cash has been collected.
    • For example, say that you sold 10,000 units of inventory for $5 a piece. You would record sales revenue of $50,000, even if your customers haven't all paid you yet.
  2. Write "Cost of goods sold" below "Sales revenue." List cost of goods sold for the period.
    • Cost of goods sold is comprised of the direct labor, direct materials, and manufacturing overhead expense you incurred to create the inventory that you sold. If you're a reseller, cost of goods sold is typically the price that you paid to purchase the inventory.
    • For example, if you sold 10,000 units of inventory during the period and paid an average of $2 for each unit, you would record $20,000 of cost of goods sold.
  3. Label the next line "Gross profit." Gross profit represents how much profit a company earns from selling products before they pay for selling, general, and administrative expenses.
  4. Subtract cost of goods sold from sales revenue. The resulting value is gross profit for the period. For example, if sales revenue is $50,000 and cost of goods sold is $20,000, you would record gross profit of $30,000 on the income statement.

Preparing the Operating Income Section

  1. Write all the types of operating expenses the business has. Operating expenses are expenses that directly relate to business administration. Next to each line item, list the amount of expense incurred during the period.[3]
    • Common operating expenses include salary and wages for those employees not directly involved in the product of goods, rent, insurance, office supplies, professional fees, utilities, transportation expense, marketing, depreciation, and property taxes. Direct labor has already been deducted from the Cost of Goods.
    • Non-cash expenses such as depreciation and amortization should also be included. Depreciation and amortization are both methods that reduce the recorded cost of assets.[4] Depreciation is most commonly calculated using a straight line method, which is gradually reducing the cost of a tangible asset over its useful life. Amortization is used for intangible assets and is calculated similarly to depreciation.
    • If the business has a large variety of expenses, you can group similar line items into one category to save space. For example, you can create an "Employee compensation" line item that includes salaries, health insurance premiums, retirement benefits, payroll taxes, worker's compensation, and payroll processing fees.
  2. Sum each operating expense line item to determine total operating expenses. Subtract total operating expenses from gross profit. The resulting value is operating income for the period. For example, if total operating expenses are $13,000 and gross profit is $30,000, operating income is $17,000.
  3. Label the next line "Operating income." Operating income represents the income that a business earned from its normal, core business functions.

Preparing the Non-operating Income Section

  1. Write all the types of non-operating revenues the business has. Non-operating revenues are revenues that don't directly relate to business operations, sales, and production. These revenues are from activities that are different or peripheral to normal operations. Next to each line item, list the amount of revenue incurred during the period.
    • Common non-operating revenues include interest revenues and gains from the sale of investments and securities. These items add to the income of the enterprise while expenses reduce income.
  2. Write all the types of non-operating expenses the business has. Non-operating expenses also don't directly relate to business operation or sales. Next to each line item, list the amount of expense incurred during the period.
    • Common non-operating expenses include interest expense paid to lenders, losses from the sale of investments, and losses from litigation.
  3. Label the next line "Non-operating income." Non-operating income represents income that didn't come from core operations.
  4. Subtract non-operating expenses from non-operating revenues. The resulting figure is non-operating income for the period. For example, if non-operating revenue is $5,000 and non-operating expenses are $3,000, non-operating income is $2,000.

Preparing the Net Income Section

  1. Label the next line "Net income." Net income represents how much income is left over from revenue after accounting for all expense
  2. Add non-operating income to operating income. The resulting value is net income for the period. In this example, net income would be $17,000 of operating income and $2,000 of non-operating income for a total of $19,000.
  3. Transfer the balance of net income to retained earnings. This resets the balance of net income for the next accounting period.
    • Retained earnings can be used to pay dividends to owners or be reinvested in business activities.

Income Statement Template

Doc:Income Statement Template

Tips

  • Search online for an income statement template to guide you in formatting and preparing your document.

Warnings

  • An income statement shows income and expenses. It does not show money received or paid. This is done using a cash flow statement.

Related Articles

Sources and Citations

  1. ↑ http://quickbooks.intuit.com/r/bookkeeping/create-income-statement-4-easy-steps
  2. ↑ http://www.accountingcoach.com/income-statement/explanation/4
  3. ↑ http://www.accountingtools.com/questions-and-answers/what-are-examples-of-operating-expenses.html
  4. ↑ http://www.investopedia.com/ask/answers/06/amortizationvsdepreciation.asp
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