How do businesses track their earnings and expenses? Well, they use something called an income statement, also known as a Profit and Loss Statement. It’s like a report card showing whether a business is making or losing money. In this blog, we’ll explain how to make one in words everyone can understand.
What’s an Income Statement?
Think of the income statement like a journey, where we start at the beginning (money coming in), go through some adventures (money spent), and end up at our final destination (money saved or lost).
Let’s Create an Income Statement
Step 1: Report Money In (Revenue)
Our journey begins with all the money earned from selling goods or providing services. This is the money that comes into the business and is the biggest number on a profitable income statement.
Step 2: Take Away Money Spent on Items Sold (Cost of Goods Sold – COGS)
Next, we need to consider the money spent to make or buy the goods we sold. This could include items like the cost of materials or workers who made the goods. When we subtract this amount from the money we earned, we get something called Gross Profit.
Step 3: Take Away Daily Running Costs (Operating Expenses)
Then, we need to take away the money spent on the day-to-day running of the business. These are items like rent for the office, salaries for workers, money spent on advertising, and more. When we subtract these costs from the gross profit, we get the Operating Income.
Step 4: Take Away Extra Costs (Other Expenses)
Sometimes, a business has other costs. Maybe they borrowed money and have to pay interest, or perhaps they lost money somewhere. We subtract these costs too, but we don’t include tax just yet.
Step 5: Take Away Taxes (Income Taxes)
The next step is to subtract taxes that are paid on the money the business made. After doing this, we reach the end of our journey – Net Income!
Why is the Income Statement Important?
An income statement is like a business’s report card. It tells us if the business made money or lost money during the year. It’s a powerful tool that helps everyone, from the boss to the workers and even people outside the business, like investors or lenders, understand how well the business is doing.
Need More Help With Your Income Statement?
When you understand how to make an income statement, it’s pretty simple. In addition, it’s a great skill to have! It helps businesses understand how they are doing and where they can improve. In spite of this, managing your own finances can often be a complex and time-consuming process. At Bornazyan & Bornazyan LLP, we specialize in providing expert accounting solutions that will make your financial journey smooth and hassle-free.
No matter what challenges you’re facing with your income statement or your entire accounting, our team of dedicated professionals is here to help. Let us assist you in navigating the financial waters. Reach out to Bornazyan & Bornazyan LLP today, and rest easy knowing your accounting needs are in the best hands. Don’t let accounting woes hinder your business’s success. Remember, a call to Bornazyan & Bornazyan LLP is a step towards financial clarity and control.