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How To Prepare Your Income Statement

by GBAF mag

An income statement is one of the two financial reports of a business that are used together and usually give the owner or management a basic idea of what the business has been doing and how it will do in the future. Generally, an income statement lists the following information for each month: income from sales, income from firm operations, and income from other sources. The income statement also lists inventory, current assets, and long-term liabilities in the following categories: accounts payable, accrued expenses, paid in full, inventory reserves, and property and equipment. The statement does not include inter-company transactions, trade debtors, and stock holders. The statement does not record personal assets and liabilities. Instead, it focuses on company assets.

Many small business owners are unsure as to what an income statement should look like. There are many reasons for this. Most small businesses are family owned and operated and therefore, the personal assets of the business are usually not as obvious as those of a large corporation. Additionally, some personal assets may have been included in the business when it was first started and later included when the business became its own separate legal entity. The reason for the existence of an income statement is to help both owner and manager (the CEO and CFO) understand the income statement they are seeing in order to make sound business decisions.

The purpose of this statement is to provide adequate, fair, and accurate information to a CPA (Certified Public Accountant) who is providing accounting services to the business owner or manager. The income statement provides a company with three things that can be compared to a profit and loss statement: income from sales, firm operations, and other expenses. The income statement compares the cost of goods sold to the cost of assets owned by the company during a specific period of time. It is comparable to the income statement of an individual. Most people compare the income statement to their personal statement because, technically, an individual’s statement is income only in the eyes of the individual.

As mentioned earlier, the purpose of the income statement is to provide a CPA with enough information to determine the net income or the bottom line. The bottom line is the income that comes from the end of the day. Some CPAs may choose to include other factors into their calculations including: Other Income, Investing Income, Interest Income, and Expenses. The difference between a profit and a loss is the difference between the net income and the bottom line. In essence, all expenses are deducted from the net income to calculate the profit.

There are two types of income statements. There are total assets with all short-term and long-term debts added together. There are also assets, liabilities, and net worth. The long-term assets refer to the long-term debts (liens, stock, and bonds) while the short-term ones refer to the inventory, goodwill, and capital assets. All items are accounted for on the balance sheet as liabilities and net worth.

The major sections of an income statement are Accounts Receivable, Accounts Payable, and Income Taxes. This is basically where your cash flows are recorded on the balance sheet. You will see many different ways to record your sales and payments on accounts receivable and accounts payable. These three items are often confused, but they really are all the same.

The final section of an income statement is the Investing and Financing section. Here, you will see your cost of capital, expenses for working capital, net incomes from equity instruments, other direct revenues, and the resulting net profits or cash flows. This section of your statement gives you the ability to see your operating expenses, financing costs, and your net income and ratios.

Now that you understand the basics of income statements, you will be better prepared to handle your own financial records and know what your actual results were. Even if you are not a professional accountant, you can still prepare one of these financial reports. All you need is a spreadsheet, a basic accounting software program, and the income statement that you want to include. You will then want to calculate your short-term and long-term assets and liabilities and the other fundamentals that go along with your income statement. Once you have your spreadsheet completed and ready to go, you can then send it out to a few of your customers or clients so that they can see your income statement and determine how their business might impact your own business. If your numbers are all right, you should be able to receive funding fairly quickly, which is important to growing your business.

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