As a business owner, have you ever felt left out of a conversation when others start to talk about their financial statement reports? When you start to hear words such as, P&L, profit and loss, statement of earnings or income statement --- the conversation may start to feel a bit awkward and overwhelming. That’s why we’re going to dive into how to understand more these statements.
Understanding the income statement is essential to business owners and investors as it provides an overview of the profitability and future growth of your business. All business owners should see the income statement as a simple and straight forward report on a business’s cash generating ability. It is a scoreboard on the financial performance of your business that reflects when sales are made and expenses are incurred.
The official definition says an income statement is:
A financial statement generated monthly and/or annually that reports the earnings of a company by stating all relevant revenues (or gross income) and expenses in order to calculate net income. Also referred to as a profit and lost statement.
The income statement is one of the five financial statements issued by a business. It reports the amount a corporation has earned during the period between two balance sheet dates.
Here are 3 things you should know about an income statement:
Income Statements come with Accounting Jargon
One thing that can make entrepreneurs shy away from financial statement conversations is the jargon used. The jargon can make it seem more complex than it really is. For example, the term “sales” or “income” might be used instead of revenue. “Expenses” and “costs” are also used interchangeably. “Profit” is sometimes called “net income.
Income Statements cover a period of time
The income statement reveals how much money your business made over a period of time. Most often, the statement will reflect the performance over a month, a quarter or a year.
For example, you might hear the words, year to date, or see “Y-T-D December 31”, indicating the period for Jan 1 to Dec 31.
Income Statement follows a formula
Every income statement, no matter how complex, follows a very simple formula.
Revenue – Expenses = Profit
For the period specified on the income statement, it will show the revenue the business earned, the expenses it incurred and the profit it made.
If you want to understand how your business operations flows, the income statement can help give you a better picture of what makes your company profitable and where the losses are coming from.
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