Every small business should know how to make an income statement. The preparation of financial statements details the specific income and expenses of a company over a specific period of time. Many stakeholders need these frequently to see how your business is performing, and not all of these stakeholders will be inside your company. Anyone from government officials to third-party service professionals to shareholders and stock owners might need them on a regular basis.
What Is an Income Statement?
What is an income statement? The income statement definition could show a snapshot of a company's expenses and revenue in a certain time period.
What does an income statement show? What goes on the income statement might vary based on the business, but there are certain elements that are typical. Skipping any of them can result in a skewed report.
- Revenue: This is the money you take in.
- Expenses: This is the money that goes out.
- COGS: Costs of goods sold is what you have spent on your products or services.
- EPS: Earnings per share is your net income getting divided over outstanding shares of the company.
- EBITDA: This is your interest before taxes, interest, depreciation, and amortization.
How to Write an Income Statement
Do you know how to do an income statement? Knowing how to prepare an income statement starts with knowing what goes on in income statements. The individual elements and calculations are all necessary.
1. Pick a Reporting Period
It's essential that you pick the right reporting timeframe for your income statement. Common intervals include monthly, quarterly, or yearly. The one you should choose should reflect your specific goals. Monthly reports detail shorter periods so you can make tactical changes to your business the following month. Longer reports give you more of a high-level overview so you can see long-term trends.
2. Generate a Trial Balance Report
If you want to know how to make a business income statement, then you need to print out a copy of your standard trial balance report. You should be able to generate a trial balance using your accounting software. These are internal documents that will list the end balance of every account in your general ledger for the designated reporting period. Coming up with these balance sheets is a vital component of making an income statement since they are how data from account balances are accounted for. This is necessary to come up with the end balance figures necessary for generating your total income statement.
3. Calculate Your Revenue
You need to know how much revenue your company generated during the period of reporting that you have chosen. If your income statement is representing the whole organization, then it needs to include revenue from every line of business. Alternatively, if you make an income statement for just one segment or business line, then you need to limit your revenue to services or products that actually fall under that purview.
4. Determine Cost of Goods Sold
Costs of goods sold for all products and services generating revenue include distribution costs, components, parts, materials, and direct labor. These specific expenses must be directly related to making the things that make you money.
5. Calculate the Gross Margin
Determining the gross profit for your designated reporting period just means subtracting the costs of your goods that were sold from your company revenue.
6. Include Operating Expenses
When you know what your gross profit is, you can then calculate your OPEX or operating expenses. These are usually indirect costs that are associated with doing general business. They're not the same as the cost of goods sold, as they aren't associated directly with the specific process of making or distributing your services or products. Specific examples that might fall under your operating expenses category might include legal fees, office supplies, overhead, utilities, and rent.
7. Calculate Your Income
If you want to calculate the income for your business, just subtract your operating expenses from your gross profit. This basically becomes your company's pre-tax income that was generated throughout your designated reporting period. This is obviously one of the more simple calculations that you will do in the whole process, but it's also one of the most important numbers that you'll need from the report.
8. Include Income Taxes
Once you calculate the income for your designated reporting period, you need to ascertain what your tax charges and interest are. Interest is simply charged as your business pays on owed debts. That means knowing how much you owe and what the specific interest rate in question is. You can automate this with the right accounting software. Your collective tax burden has to include local, payroll, state, and also federal taxes for the reporting period. This includes local, state, and federal taxes, as well as any payroll taxes.
Income Statement Example
Despite reading all this, you might not be sure what an income statement looks like. Having an example to go by makes it much easier to visualize.
The meaning behind a fictional sample is simply so you have a rough template to go by when coming up with your first draft. It starts with the name of the company, any specific team involved, and then the time period covered before breaking down detailed information you can mimic with your own.
Knowing how to prepare an income statement shouldn't just be left to accounting professionals. Anyone that learns this skill gains a deeper understanding of the financials of their business. Use an income statement to make near-future changes for shorter reporting periods or determine long-term strategy by looking at long-running trends. The professionals at Lewis.CPA can help you both generate income statements and learn all about the details they report. Contact us!