Understanding exactly what your company has generated in revenue is essential to gauging business performance and determining your profitability. An income statement is a good place to start for this, because it consolidates your revenue and expenses into a clear, easy-to-understand report. The income statement is a vital part of any proposal to investors or lenders. If you've never created one before, it's in your best interest to work with an accountant or an accounting service provider. Here's a look at the components of the statement and how they go together.
Understanding the Importance of the Header
Don't underestimate the value that the income statement header offers to the report. Your income statement's header should include a clear definition of the time period covered. This is essential for proper assessment of your company's activities. Create an income statement template that includes your company's name at the top followed by "Income Statement" on the second line. The third line should detail the period covered. For example, if you're covering a fiscal year, report it as "For the Fiscal Year Ending" and include the last day of the fiscal year.
Creating Your Revenue Information
The first section below the header should be labeled "Income Information." On the first line beneath it, enter "Net Sales" followed by your net sales figure for the period in question. The net sales figure is your total sales less the total of any returns during the period. On the line below that, add "Cost of Sales" and then place the cost of goods sold on that line. This reflects the cost to manufacture those products. The final line of this section should be "Gross Margin" and should be the difference between your net sales and the cost of goods sold.
Listing Your Operating Expenses
Once you've compiled all of your revenue numbers, it's time to get into your costs. Create a new section labeled 'Operating Expenses' immediately below your revenue numbers. This section will include all of your costs associated with sales and operations. It should also include amortizations of your insurance and other prepaid policies and depreciation of your capital equipment. Add all of these things together under a listing that says "Total Operating Expenses." After this line, create one more labeled "Operating Income" to list the difference between the "Gross Margin" total and the figure in "Total Operating Expenses."
Summarizing the Bottom Line
The final section of the Income Statement should be labeled "Other" and include any other income figures, such as those from dividends or interest. You should also include any other expenses, including income taxes. The last line should be labeled "Net Income" and should reflect the difference between the operating income and the total of any other income and expenses.
Income statements are a vital part of any business operation, because it clearly illustrates your earnings. Talk with an accounting professional (such as one from Hurren Sinclair MacIntyre CPA's LLP) about how often you should create them, then reach out for guidance if you need it during the process.