The income statement, also known as the profit and loss statement, is a financial statement which conveys basic information regarding business operations over a given period.
A company’s business operations consist primarily of revenues and expenses.
A company’s revenues constitute sales of goods or services, while expenses are costs associated with the generation of revenues. If revenues exceed expenses, the company generates a profit. If expenses exceed revenues, the company generates a loss.
An income statement can be prepared on a cash basis or an accrual basis. Income statements prepared on an accrual basis provide better information regarding business operations, as revenues and expenses are better matched to the relevant period.
An income statement can be presented in a single-step or multi-step format. A single-step income statement does not contain subtotals. Rather, profit (or loss) is calculated by directly subtracting all expenses from revenues. A multi-step income statement, on the other hand, calculates subtotals such as gross profit and total expenses.
Income statements will look different for different businesses. For example, the income statement for a marketing agency will look different than the income statement for a retailer.
The “bottom line” of an income statement refers to the company’s net income (or loss). For companies which pay tax at the corporate level (C-Corporations), the income statement contains a provision for taxes. Most small businesses, however, are “pass-through” entities. Thus, for most small businesses, net income refers to pre-tax income.
