What is an income statement?
An income statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specific period. It is also commonly known as a profit and loss statement (P&L). Along with a balance sheet and statement of cash flows, the income statement should be featured in every entrepreneur’s business plan as a pro forma statement.
Together, these three financial statements make up the minimum reporting requirements on a quarterly basis for publicly owned companies.
Exploring the Income Statement
The income statement shows changes in accounts over a specific period. Unlike the balance sheet, which shows a summary of what a company owns and owes in a single snapshot, the income statement summarizes how much profit or loss was generated by a business.
As with all other GAAP-compliant financial statements, income statements follow a prescribed format:
The first entry is for revenue. This is often referred to as “top line” or top-line revenue. This is the starting revenue for the period before costs are deducted. Once all costs have been deducted, the resulting difference is entered on the bottom line and is known as bottom-line revenue.
Costs for the reporting period are deducted from the top-line revenue figure. These typically include general costs of doing business, such as the cost of goods sold and salaries or wages. Other common costs detailed on the income statement are operating expenses, tax expenses, and interest expenses.
The bottom-line revenue—or net revenue—is the difference between the top-line revenue figure and the remainder once costs have been deducted. Hopefully the bottom-line number is positive. A positive net revenue number indicates that the company is covering its costs and turning a profit.
If the bottom-line number is negative, however, this indicates that the company was not able to cover costs for the period and is reporting a loss.
In the event of a loss, the income statement is likely not telling the whole story. To uncover the true cause of shrinking revenues or growing costs, it may be necessary to dig deeper. Additionally, a single income statement does not paint an accurate picture of a company’s changing financial circumstances. To understand how a company’s costs, revenues, and profit are changing over time, review income statements from several accounting periods from the past.
With this information you can see larger trends in revenue growth, cost reduction, and general business profitability.