What is an income statement? (Plus template and how to)
By Indeed Editorial Team
Published 24 May 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Keeping clear financial records is important for any business, regardless of the size, scale or industry of that business. Income statements are one of the most effective and commonly used means of tracking finances within a specified period, such as every quarter. Knowing how to write an income statement is crucial for any business that wishes to manage its finances well. In this article, we explain what an income statement is, what an income statement includes and provide a template and how-to guide for you to follow.
What is an income statement?
The answer to 'What is an income statement?' is simply a type of financial document, typically alongside invoices, and is one of the most frequently used types of financial documents. It's used by businesses that endeavour to provide evidence of their financial performance over an allocated period. Most commonly, you do this quarterly. Some organisations may wish to file income statements on a more regular basis depending on their needs. The more regularly you complete an income statement, the more accurately you can keep track of your overall financial movements.
Related: 10 essential finance manager skills
Why use an income statement?
You use income statements as a written means of depicting how a company is using its revenue and how you expect this revenue to translate into either a profit or a loss. This enables companies to view the current success rate and financial efficiency of their current proceedings and paints a picture of what areas are succeeding and what areas require improvement.
Income statements are also useful for presenting to shareholders, sponsors and other additional parties a comprehensive picture of a company's current financial state. Another common purpose of income statements is to assist business leaders with decisions relating to the growth of the company by providing objective financial facts to base decisions.
Related: What is net pay?
Why are income statements important?
Income statements are essential for the success of a modern business. This is because they assist with many elements that help to preserve the financial health of a company, including making future decisions to maximise potential profits. Income statements are also important because they provide a clear and impartial picture of the current financial status of a company, which allows those within the company to identify areas of weakness that require improvement.
Parts of an income statement
An income statement consists of multiple parts. Most commonly, there are four components that make up an income statement. Below are each of the four parts explored in more detail:
The first component of an income statement is the expenses. This refers to any required costs for the business to continue operating. Some people also call expenses the cost of goods sold. Often, expenses are the products that are required to provide services or goods to customers. Examples of expenses include:
Revenue is the opposite of any expenses. Also commonly referred to as operating revenue or sources of income, revenue is any form of profits made through the services or sale of products that the company offers. One thing to note about revenue is that this refers to the figures prior to any interest or tax being paid on the profit. Examples of revenue include:
Gross profit refers to the collective combination of all the streams of income a company has, minus any of the associated costs. Calculating the gross profit of a company is simple enough. Just add up all the profits and subtract the costs of goods sold. The figure that you're left with is the gross profit. One thing to consider is that gross profit is a separate figure from the net profit. The net profit considers additional factors, such as tax and interest. The gross profit doesn't.
The next element of an income statement is the losses of a company. Acknowledging the losses of a company is equally important to acknowledge the profits. You can calculate the losses of a business by adding up all the sales made within the allocated period and subtracting all the costs of goods, before then additionally subtracting things such as depreciation and amortisation.
Earnings before interest, taxes, depreciation and amortisation (EBITDA)
You don't always include the earnings before interest, taxes, depreciation and amortisation (EBITDA) on every income statement. Many businesses still opt to include EBITDA as it helps to provide a more comprehensive picture of the company's current financial standings. You can calculate a company's EBITDA by combining depreciation and amortisation with taxes, interest expenses and net income.
How to write an income statement
Writing an income statement is simple if you follow a clear set of steps. This ensures that everything that is relevant is present within the document. Using the same format for all of your income statements can also help you have clean financial records over the lifespan of the business. Here is how to write an income statement:
1. List all the company's revenue
The first step in writing an income statement is to list all the company's revenue streams. Something important to note is that you only include the revenue sums, especially the gains, during the chosen period of operation. You can aim to be as thorough as possible to give an accurate summary of the company's revenue in full.
2. List all the company's expenses
Next, you can list all the company's identified expenses. Remember that a common phrase for expenses is the cost of goods. As with revenue, you can try to be thorough and objective when listing all the known expenses of the business.
3. Calculate and list the company's gross profit
The third step in writing an income statement is to calculate and list the gross profits of the company. You can calculate the gross profit by taking the overall sales revenue total and subtracting away the costs of the goods sold (expenses). In doing so, remember to include any temporary profits, such as a onetime sale or the sale of company assets.
4. Expand upon details relating to the company's expenditure
Following on from this, you can aim to include any required details about the aforementioned expenses and expand on the details accordingly to provide context where necessary. Eligible expenses include interest, which is always included. Once you have done this, take the total amount and input it into the document.
5. Calculate and list the company's net income before taxes
A company's net income before taxes is one of the most important elements of an income statement. You can calculate the net income before taxes by subtracting the total expenses number from the gross profit. The number that is left at the end is the net income.
6. List any depreciation and amortisation expenses
It is usually a qualified financial expert, such as an accountant, who calculates the depreciation and amortisation expenses. Once you receive these figures back from the accountant, you can input them into the income statement. Once you have these figures, you can then calculate your net income. You may list this as well.
Income statement template
Using a template is a great place to start when creating your first or recurring income statement. Below, you can find one sample template for an income statement:
Income statement for [Company Name]
For the quarter ending: [Date]
• Sales revenue: [Input the sales revenue figures]
• Services revenue: [Input the services revenue figures]
• Total revenue: [Sales revenue figures] + [Services revenue figures] = [Total revenue figure]
• Cost of goods sold: [Beginning inventory] + [Purchases sold] = [Ending inventory]
• Gross profit: [Profit total] - [Cost of goods sold] = [Gross profit] Expenses: • Rent: [Input the cost of rent]
• Utilities: [Input the cost of utilities]
• Labour: [Input the labour costs]
• Administrative costs: [Input the administrative costs]
• Loan interest: [Input any loan interest costs]
• Total expenses: [Combine all expenses here]
Net income before taxes: [Gross profit] - [Total expenses] = Net income before taxes
Depreciation and amortisation: [Input depreciation total, amortisation total and totals of other taxes]
Net income: [Total expenses] - [Depreciation and taxes owed] = Net income
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