Income Statements
An income statement, otherwise known as a profit and loss statement, is a
summary of a companys profit or loss during any one given period of time, such
as a month, three months, or one year. The income statement records all revenues
for a business during this given period, as well as the operating expenses for
the business.
What are income statements used for?
You use an income statement to track revenues and expenses
so that you can determine the operating performance of your business over a
period of time. Small business owners use these statements to find out what
areas of their business are over budget or under budget. Specific items that are
causing unexpected expenditures can be pinpointed, such as phone, fax, mail, or
supply expenses. Income statements can also track dramatic increases in product
returns or cost of goods sold as a percentage of sales. They also can be used to
determine income tax liability.
It is very important to format an income statement so that it is appropriate
to the business being conducted.
Income statements, along with balance sheets, are the most basic elements
required by potential lenders, such as banks, investors, and vendors. They will
use the financial reporting contained therein to determine credit limits.
1. Sales
The sales figure represents the amount of revenue generated by the
business. The amount recorded here is the total sales, less any product returns
or sales discounts.
2. Cost of goods sold
This number represents the costs directly associated with making or
acquiring your products. Costs include materials purchased from outside
suppliers used in the manufacture of your product, as well as any internal
expenses directly expended in the manufacturing process.
Gross profit
Gross profit is derived by subtracting the
cost of goods sold from net sales. It does not include any operating expenses or
income taxes.
3. Operating expenses
These are the daily expenses incurred in the operation of your business.
In this sample, they are divided into two categories: selling, and general and
administrative expenses.
Sales salaries
These are the salaries plus bonuses and
commissions paid to your sales staff.
Collateral and promotions
Collateral fees are expenses incurred in the
creation or purchase of printed sales materials used by your sales staff in
marketing and selling your product. Promotion fees include any product samples
and giveaways used to promote or sell your product.
Advertising
These represent all costs involved in creating
and placing print or multi-media advertising.
Other sales costs
These include any other costs associated with
selling your product. They may include travel, client meals, sales meetings,
equipment rental for presentations, copying, or miscellaneous printing costs.
Office
salaries
These are the salaries of full- and part-time
office personnel.
Rent
These are the fees incurred to rent or lease
office or industrial space.
Utilities
These include costs for heating, air
conditioning, electricity, phone equipment rental, and phone usage used in
connection with your business.
Depreciation
Depreciation is an annual expense that takes
into account the loss in value of equipment used in your business. Examples of
equipment that may be subject to depreciation includes copiers, computers,
printers, and fax machines.
Other overhead costs
Expense items that do not fall into other
categories or cannot be clearly associated with a particular product or function
are considered to be other overhead costs. These types of expenses may include
insurance, office supplies, or cleaning services.
4. Total expenses
This is a tabulation of all expenses incurred in running your business,
exclusive of taxes or interest expense on interest income, if any.
5. Net income before taxes
This number represents the amount of income earned by a business prior to
paying income taxes. This figure is arrived at by subtracting total operating
expenses from gross profit.
6. Taxes
This is the amount of income taxes you owe to the federal government and,
if applicable, state and local government taxes.
7. Net income
This is the amount of money the business has earned after paying income
taxes.
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