The Income Statement
How to read them, how to prepare them.

What is an Income Statement?

An Income Statement is a financial report that lists all the revenue (income) and expenses for your small business for a stated period of time. This time period could be a month, or a year, or several years.

The Income Statement is one of the three top Financial Statements. The other two would be the Balance Sheet , and the Cash Flow Statement.

It may seem intimidating to look at a corporate Income Statement showing several years worth of financial data, but luckily most small businesses require only a modest statement of earnings and expenses, culminating in a bottom line figure of net profit or loss for the time period.

Income or Profit??

INCOME means revenue, which means sales dollars.

NET INCOME means profit.

PROFIT means a positive figure left after you subtract your expenses from your income. It means you made something on your investment of time and money put into your small business, as opposed to a loss, which means your expenses are greater than your income. That's not a good thing.

Here's a simple example of an Income Statement.

This is an Income Statement for an attorney. Take a good look at it.

Revenue is listed first. She only has one stream of income, her legal fees.

Expenses are listed next. You see the usual small business expenses here, rent, salaries, phone, etc. These are totalled and subtracted from Total Revenue.

The result of the calculation is a profit, or Net Income. Had expenses been more than income, this would be a loss.

So now we know what we're looking at. Look a little deeper, and we can see more about this business. If there were any strange expenses, we would see it here. If she had been sued, for example, we'd see a large figure for legal fees expense. Goodness, we hope not! Also, note that her profit is about 50% of her income. That's awesome!

Now let's look at another example.

PROFIT MARGIN? This is the Net Income or Profit divided by Total Revenue, in this case it's $15515/$51690 or 30%. Remember in the other example it was about 50%.

Also note the depreciation expense. This alerts you to the fact that they own their building and cleaning equipment.

These statements are very quickly computed and spit out for you if you're using Quickbooks or another small business computer software program.

They are also fairly easy to prepare if you have, let's say, a month of deposit slips and check stubs. Add your income together from the deposit slips. Separate the information from your check stubs by expense, and list your expenses out and total them up. You should have a list of, say, rent, utilities, phone, insurance, supplies, etc. Then just subtract the Total Expenses from your Income, and there you have a Profit or Loss figure for that month.

Not too shabby, huh?