An income statement, also known as a profit and loss statement or P&L statement, is a financial statement that summarizes an organization’s revenues, expenses, and profits or losses over a specific period of time. It provides insights into the company’s financial performance and profitability, showing how much money the company earned and spent, and what the resulting net income or loss was.
Key Components of an Income Statement
- Revenues (Sales):
- Definition: The total income generated from the sale of goods or services before any expenses are deducted.
- Types:
- Operating Revenues: Income earned from the primary business activities, such as sales of products or services.
- Non-Operating Revenues: Income earned from secondary activities, such as interest income or gains from investments.
- Cost of Goods Sold (COGS):
- Definition: The direct costs attributable to the production of the goods sold by the company. This includes expenses like raw materials, labor, and manufacturing overhead.
- Impact: Subtracting COGS from revenues gives the gross profit.
- Gross Profit:
- Definition: The profit earned from core business activities, calculated as: Gross Profit=Revenues−Cost of Goods Sold\text{Gross Profit} = \text{Revenues} – \text{Cost of Goods Sold}Gross Profit=Revenues−Cost of Goods Sold
- Operating Expenses:
- Definition: Expenses incurred in the normal course of business operations. These are categorized into:
- Selling Expenses: Costs related to selling activities, such as salaries for sales staff and marketing expenses.
- Administrative Expenses: Costs related to general administrative functions, such as salaries for office staff, rent, and utilities.
- Definition: Expenses incurred in the normal course of business operations. These are categorized into:
- Operating Income (Operating Profit):
- Definition: The profit earned from regular business operations, calculated as: Operating Income=Gross Profit−Operating Expenses\text{Operating Income} = \text{Gross Profit} – \text{Operating Expenses}Operating Income=Gross Profit−Operating Expenses
- Non-Operating Income and Expenses:
- Definition: Revenues and expenses not related to the core business operations, such as:
- Interest Income/Expense: Earnings from investments or interest paid on borrowings.
- Gains/Losses on Investments: Profits or losses from the sale of investments or assets.
- Other Non-Operating Items: Special items, such as litigation settlements or restructuring costs.
- Definition: Revenues and expenses not related to the core business operations, such as:
- Income Before Tax (Pre-Tax Income):
- Definition: The income earned before income taxes are deducted, calculated as: Income Before Tax=Operating Income+Non-Operating Income−Non-Operating Expenses\text{Income Before Tax} = \text{Operating Income} + \text{Non-Operating Income} – \text{Non-Operating Expenses}Income Before Tax=Operating Income+Non-Operating Income−Non-Operating Expenses
- Income Tax Expense:
- Definition: The amount of taxes owed based on pre-tax income. This can be broken down into current taxes payable and deferred taxes.
- Net Income (Net Profit or Loss):
- Definition: The final profit or loss after all revenues, expenses, and taxes have been accounted for, calculated as: Net Income=Income Before Tax−Income Tax Expense\text{Net Income} = \text{Income Before Tax} – \text{Income Tax Expense}Net Income=Income Before Tax−Income Tax Expense
- Impact: Net income represents the company’s profitability and is a key indicator of financial performance.