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Income Statement – Simple Definition & Examples

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Income Statement in Simple Words

Income Statement (or Profit & Loss Statement, P&L) shows how much profit a business has made after deducting expenses from its revenue.

The income statement (also known as Profit and Loss Statement, or P&L) provides a summary of 

  • How much a business has earned from sales of products or services (Revenue)
  • How much a business has spent on costs, such as salaries, rent, manufacturing, etc. (Expense)
  • How much profit (or loss) a business has accumulated in the past year (Net income or Net Loss)

Purpose of Income Statement

As one of the four financial statements, Income Statement calculates how profitable a business is by subtracting expenses from revenue. For example, an Uber driver earned $20,000 in fares and spent $3,000 on gas and $2,000 on maintenance last year. Last year’s profit or net income would be $15,000 ($20,000 Revenue – $3,000 Gas Expense – $2,000 Maintenance Expense). Income Statement presents calculations like this in detail.

Two Formats of Income Statement

The level of detail in the Income Statement differs from business to business. 

  • Small local businesses, such as mom-and-pop shops, usually have simple sources of income and fewer categories of expenses. Often, they only need the Single Step Income Statement.
  • Publicly traded companies typically have extensive Income Statements as investors seek to understand more than just their total earnings and expenses. This includes identifying one-off losses, like lawsuits, and differentiating income and expenses related to non-business activities, such as interest. In this case, they often present the Multi Step Income Statement.

Below are examples in both formats. One is suited for small businesses with basic and straightforward operations, while the other is designed for larger companies with more complex activities.

Income Statement Simple Examples

Pho my Life Noodle Shop (PML) presented its Income Statement for the year ended 12/31/2024:

Simple Format – Single Step Income Statement:

  • The top section of the report displays the total sales or revenue generated by the PML noodle shop from its food and beverage sales. Their sales totaled $200,000, with $190,000 from food and $10,000 from beverages.
  • The section below details the $165,000 PML noodle shop has spent throughout the year. 
    • Cost of Goods Sold (COGS) – $80,000. This is an accounting term defining money spent directly on producing the product. In the case of the PML noodle shop, it is money spent on making the food and beverages, such as purchasing ingredients, etc.
    • Salaries ($35,000), Rent ($30,000), and Utilities ($5,000) – These are not costs related to producing the food but are otherwise necessary to operate the restaurant. Costs like these are typically called “Operating Expenses.”
    • Interest ($5,000) and Tax ($10,000) – These are indirect expenditures not necessarily related to the regular business operation of PML Noodle Shops. For example, the PML noodle shop had an interest expense because the owner borrowed a high-interest loan, which has nothing to do with how they manage the restaurant’s day-to-day operation. PML also had to pay taxes, which the owner could not control.
  • The bottom line shows a net income of $35,000, which is calculated by subtracting the total expenses of $165,000 from the total revenue of $200,000. 

Advanced Format – Multi Step Income Statement

Income Statement can be presented in a more advanced format to aid investor and third-party understanding of the business. Assuming PML noodles shop is trying to attract some investment, and they presented their income statement the following way:

Note A: Gross Margin – $120,000, calculated by subtracting Cost of Goods Sold ($80,000) from Sales ($120,000). This top section shows the profitability of the product only. In this case, it tells the potential investor how much profit their food/beverage has generated by themselves, disregarding other operating expenses.

Note B: Total Operating Expense – $70,000. As mentioned earlier, these are the costs of running the restaurant, which differ from the costs of producing the food. By looking at this number, investors can tell how well the business managed its expenses other than producing food and beverages.

Note C: Total Operating Income $50,000 – calculated by subtracting total operating expense ($70,000) from Gross Margin ($120,000). This line tells the investors how much income or loss a business has earned through the ordinary course of operation. Many investors pay attention to this line as it truly reveals a company’s ability to manage its profitability. Non-operating costs, such as taxes and interest, are often excluded when evaluating a business owner’s management skills due to their uncontrollable nature.

Note D: Income before Tax – $45,000, calculated by subtracting non-operating expenses (in this case, the interest expense of $5,000) from Total Operating Income of $50,000. This line provides information to investors who are concerned about everything besides taxes, including non-operating items such as interest. It is also useful for tax preparers who must determine the year’s final tax due.

Note E: Net Income $35,000, calculated by subtracting tax expense $10,000 from Net Income before Tax ($45,000). 

The Single Step format is suitable for small businesses that only need to know their profit, while the Multi Step format is more beneficial for investors, tax preparers, or any parties who require more detailed metrics beyond just a list of revenues and expenses.

Quick Q&A

Q: What is Income Statement used for?

A: Income Statement presents how much profit or loss a business has incurred in a period.


 

Q: What is the difference between Income Statement and P&L (Profit and Loss)

A: They are the same. There is no difference. P&L stands for Profit and Loss Statement, which is also known as Income Statement


 

Q: What is the Income Statement formula?

A: Revenue – Expenses = Net Income 


 

Q: Why Income Statement is prepared first?

A: Income Statement is always prepared first because it determines the net income required for the equity section of the Balance Sheet. See the order of financial statements preparation here.


 

Q: Is Income Statement year-to-date (YTD)?

A: It depends. Typically, companies prepare financial statements on a yearly basis, making Income Statement year to date. However, for companies that must release quarterly financial statements, the Income Statement would be prepared for the quarter-to-date period. This includes publicly traded companies or those that must report quarterly financial results to their lender for compliance. Lastly, it is uncommon to find a Monthly Income Statement, whereas a Yearly Income Statement is the most frequently used. 


 

Q: Is Income Statement point in time?

A: No. Income Statement covers a specific period (usually a year or a quarter). Balance Sheet is the only financial statement that is point in time.


 

Q: Does Income Statement need to be balanced?

A: No. Income Statement merely calculates profit by deducting expenses from revenue, and nothing is to be balanced. Balance Sheet is the only financial statement that needs to be balanced.


 

Q: Does Income Statement include VAT?

A: No. Numbers within Income Statement are presented before VAT. 


 

Q: Is Income Statement a source document?

A: No. Income Statement is prepared using source documents such as receipts and invoices. However, the Income Statement itself is not considered a source document.


 

Q: What is the difference between Revenue and Net Income/Profit

A: Revenue is how much you’ve collected from customers, while Net Income/Profit is how much you truly made after deducting expenses from the revenue 


 

Q: What is Other Comprehensive Income (OCI)?

A: Other Comprehensive Income or OCI is a more advanced element in the Income Statement, often presented by large, publicly traded companies. It is required that certain types of gain or loss, such as those from Foreign Currency Transactions (FX) or derivative instruments, need to be presented separately from net income.

 

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