Income Statement
Financial Statements
Income Statement
A fiscal year is the period used for calculating annual (yearly) income statements.
While a large number of businesses use the calendar year (January-December) as their fiscal year, a business can elect to use any other twelve month period such as June-May for their fiscal year.
The categories and format(s) of the Income Statement follow the rules known as Generally Accepted Accounting Principles (GAAP) and contain specific revenue and expense categories.
Revenue (Also Called Income)
Formal Definition:The gross increase in owner’s equity resulting from the operations and other activities of the business.
Informal Definition:Amounts a business earns by selling services and products. Amounts billed to customers for services and/or products.
Expense (Also Called Cost)
Formal Definition:Decrease in owner’s equity resulting from the cost of goods, fixed assets, and services and supplies consumed in the operations of a business.
Informal Definition:The costs of doing business. The stuff we used and had to pay for or charge to run our business.
Additional Explanation:
Some examples of business expenses are office supplies, salaries & wages, advertising, building rental, and utilities.
Hopefully a business earns a profit called net income (revenues are larger than expenses). If however, expenses are larger than revenues a net loss results.
The major sections of an income statement are the heading, the revenue section, the expense section, and the final calculation of a profit or loss. The heading should contain the name of the company, the title of the statement, and the period covered by the statement.
An Income Statement is just a formal summary of “Mom Capital’s “Kids” Revenue and Expense.
The Income Statement for ABC Mowing is presented below.
| ABC Mowing | ||
| Income Statement | ||
| For The Period Ending December 31,xxxx | ||
| Revenue from operations | $1,205 | |
| Expenses | ||
| Advertising Expense | $225 | |
| Mulch Expense | 160 | |
| Total Expenses | $385 | |
| Net Income | $820 | |
Note: In the real world an income statement would have many more expense categories than the two types illustrated in our simple example . Some additional expenses that would normally be included are:
- Office Supplies Used
- Telephone
- Building/Office Rent
- Utilities
- Depreciation Expense
- Maintenance and Repairs
- Interest Expense
- Memberships
- Donations
- Bank Fees and Charges
- Salaries & Wages
- Employment Taxes
- Equipment Rental
- Contract Labor
- Professional Fees
- Travel
- Entertainment
- Any other type that your business incurs
Our Income Statement or what is sometimes also referred to as a Profit and Loss Statement was prepared for a service type of business and is in the format of what is called a
Single Step Income Statement.
A single step income statement is the income statement format where all the revenues and gains are grouped together and totaled and all the expenses are grouped together and totaled. Net Income is then calculated by subtracting the total expenses from the total revenues.
Below is a sample Single Step Income Statement with additional expenses listed.
| Example Company | |
| Income Statement | |
| For Period Ending December 31,xxxx | |
| Revenues & Gains | |
| Service Revenues | $300,000 |
| Interest Income | 5,000 |
| Gain on asset sales | 2,000 |
| Total revenues & gains | $307,000 |
| Expenses & Losses | |
| Salaries & wages | $100,000 |
| Payroll taxes | 10,000 |
| Office supplies | 2,000 |
| Maintenance & repairs | 4,000 |
| Vehicle expenses | 5,000 |
| Advertising expenses | 7,000 |
| Telephone & internet | 3,000 |
| Insurance expense | 10,000 |
| Professional fees | 5,000 |
| Building rental | 20,000 |
| Depreciation expense | 5,000 |
| Utilities | 6,000 |
| Travel & entertainment | 4,000 |
| Taxes | 15,000 |
| Total expenses | $196,000 |
| Net income | $111,000 |
Businesses that are retailers, wholesalers, or manufacturers that sell products have a special section included in their income statement called Cost Of Goods Sold. This section computes the Cost Of The Goods Sold that were either purchased and sold or manufactured and sold.
In retailing and wholesaling, computing the cost of goods sold during the accounting period involves beginning and ending inventories. In manufacturing it involves finished-goods inventories, raw materials inventories and goods-in-process inventories.
These types of businesses would normally use an alternative to the single-step income statement format called the multiple-step income statement, because it uses multiple subtractions in computing the net income shown on the bottom line.
The multiple-step profit and loss statement segregates the operating revenues and operating expenses from the nonoperating revenues, nonoperating expenses, gains, and losses. The multiple-step income statement also shows the gross profit (net sales minus the cost of goods sold).
Sample Multi-Step Income Statement
| Example Company | |
| Income Statement | |
| For Period Ending December 31,xxxx | |
| Revenues & Gains | |
| Service Revenues | $300,000 |
| Interest Income | 5,000 |
| Gain on asset sales | 2,000 |
| Total revenues & gains | $307,000 |
| Cost Of Goods Sold | 150,000 |
| Gross Profit | $157,000 |
| Operating Expenses | |
| Salaries & wages | $40,000 |
| Payroll taxes | 5,000 |
| Office supplies | 2,000 |
| Maintenance & repairs | 4,000 |
| Vehicle expenses | 5,000 |
| Advertising expenses | 7,000 |
| Telephone & internet | 3,000 |
| Insurance expense | 10,000 |
| Professional fees | 5,000 |
| Building rental | 10,000 |
| Depreciation expense | 5,000 |
| Utilities | 6,000 |
| Travel & entertainment | 4,000 |
| Taxes | 5,000 |
| Total operating expenses | $111,000 |
| Operating Income | $46,000 |
| Non operating & other | |
| Interest revenue | 2,000 |
| Gains | 5,000 |
| Interest Expense | (4,000) |
| Losses | (1,000) |
| Total non operating | $2,000 |
| Net income | $48,000 |
What caused the owner's claim to the assets to increase or decrease ?
The reasons are provided by the Capital Statement
