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Understanding an Income Statement

by GBAF mag

An income statement is basically a comprehensive financial statement showing you how profitable your company was during a given year. It reveals your revenue, including your gross profit, minus your costs and expenses. Also sometimes known as a full-cycle statement of income, the income statement provides the third most important financial report in accounting, right after the balance sheet and cash flow statement (or both). In business, an income statement tells you if you made money or lost money during a given year, as well as how much of that money you kept for yourself.

Income statements can be prepared in two different ways. The first is called the standard method, which uses prepared tables that are then based on assumptions about historical data. The second method is called the results-based method, which relies on the assumption that all revenue and expenses are necessarily realized by the company in the same amount, at the same time. Using the results-based method, companies must estimate the effect of changing factors such as seasonality, holiday purchases, holidays, payroll, and layoff/ exit effects. The standard method results in very basic information, which makes it rather easy to calculate. The results-based method, on the other hand, produces more detailed and reliable information, which makes it the preferred method used by financial institutions and private investors.

One of the main reasons why companies need to submit an income statement to their shareholders is to allow them to track and monitor their company’s performance. The income statement will provide a record of all revenues and expenses. By tracking profits and loss, investors can see how efficiently they’re being managed and how much they could potentially gain from the company. The balance sheet, on the other hand, is used to record financial performance on an ongoing basis. As such, it’s used to compare net income between periods (usually every three months), to show trends and patterns, and to identify opportunities for future growth.

There are two parts to an income statement and they’re the income statement itself and the statement of operations or COC for short. Operating expenses are those costs incurred in carrying out the business’s activities. They include office rent, supplies, taxes, and additional employee benefits such as insurance. Capital expenses include expenses for building and grounds maintenance as well as specific equipment. Capital assets include money owed to the company or owner, property purchased with capital assets, and other securities.

The balance sheet is what readers usually view first when they look at income statements. It shows how revenue earned (the money from sales) compared to expenses incurred (which includes the value of the capitalized assets). The difference between the two incomes is what’s reported in the profit and loss statement. Balance sheets are also used to show the overall health of an enterprise.

Net income statement. This portion of financial statements that include not only revenue and expenses but also gross selling, gross administrative expenses, and net selling expenses to and from external users. External users are companies and individuals that buy the products and services produced by the company.

You can get a more detailed explanation of all of these items on the net income statements (NSS) available on most accounting websites. The US GAAP (Generally Accepted Accounting Principles) also outlines how to prepare these financial reports. To learn more about how to prepare your own income statements (managers must follow the guidelines in the US GAAP), contact a local bookkeeping service.

To summarize, an income statement presents the income earned during a particular time period. A profit statement shows how much money was made or lost. A loss statement details how much money was spent or earned and how it affects the income statement. Both statements must be prepared in the same way because the information they report will be the same. To learn more about the income statement preparation, contact a bookkeeping service. They will help you plan, prepare, and maintain your accounts.

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