How to Prepare an Income Statement? A Simple 10 Step Business Guide
To prepare an income statement, you will need to generate a trial balance report, calculate your revenue, determine the cost of goods sold, calculate the gross margin, include operating expenses, calculate your income, include income taxes, calculate net income and lastly finalize your income statement with business details and the reporting period.
If you have found yourself struggling to find the time to create your own statement from scratch, a free invoice statement template is the perfect solution.
FreshBooks provides free template income statements that are pre-formatted for your needs. All you need to do is fill in the empty fields with the numbers you’ve calculated. No stress, just results.
To prepare an income statement, small businesses need to analyze and report their revenues, expenses and the resulting profits or losses, for a specific reporting period. The income statement, also called a profit and loss statement, is one of the major financial statements issued by businesses, along with the balance sheet and cash flow statement.
Balance sheets are snapshot summaries of a company’s assets, debts, and equities.
Cash flow statements are financial statements that detail the amount of money a company has generated and spent.
Income statements show how much profit a business generated during a specific reporting period and the amount of expenses incurred while earning revenue.
These topics will show you how to prepare an income statement:
NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.
How to Write an Income Statement
We have a free income statement template you can use as a guideline. Fully compatible with Microsoft Word or Google Docs, you can download these templates and customize them with your own content.
Simply visit FreshBooks for an example of an invoice template, download the right format for your needs, and then you can start filling in the blanks. A Microsoft Word template is a great way to start out, as the format is easy to use and familiar to many users.
Or, continue reading to start creating one from scratch!
The best way to ascertain how much revenue your business has generated, you’ll need to create a performance statement alongside other financial statements. To write an income statement and report the profits your small business is generating, follow these accounting steps:
1. Pick a Reporting Period
The first step in preparing an income statement is to choose the reporting period your report will cover. Businesses typically choose to report their income statement on an annual, quarterly or monthly basis. Publicly traded companies are required to prepare financial statements on a quarterly and annual basis, but small businesses aren’t as heavily regulated in their reporting. Creating monthly income statements can help you identify trends in your profits and expenditures over time. That information can help you make business decisions to make your company more efficient and profitable.
2. Generate a Trial Balance Report
To create an income statement for your business, you’ll need to print out a standard trial balance report. You can easily generate the trial balance through your cloud-based accounting software. Trial balance reports are internal documents that list the end balance of each account in the general ledger for a specific reporting period. Creating balance sheets is a crucial part of creating an income statement, as it’s how a company gathers data for their account balances. It will give you all the end balance figures you need to create an income statement.
3. Calculate Your Revenue
Next, you’ll need to calculate your business’s total sales revenue for the reporting period. Your revenue includes all the money earned for your services during the reporting period, even if you haven’t yet received all the payments. Add up all the revenue line items from your trial balance report and enter the total amount in the revenue line item of your income statement.
FreshBooks provides an easy-to-follow accounting formula to make sure that you’re calculating the right amounts and creating an accurate income statement.
4. Determine Cost of Goods Sold
Your cost of goods sold includes the direct labor, materials and overhead expenses you’ve incurred to provide your goods or services. Add up all the cost of goods sold line items on your trial balance report and list the total cost of goods sold on the income statement, directly below the revenue line item.
5. Calculate the Gross Margin
Subtract the cost of goods sold total from the revenue total on your income statement. This calculation will give you the gross margin, or the gross amount earned from the sale of your goods and services.
6. Include Operating Expenses
Add up all the operating expenses listed on your trial balance report. Each expense line should be double-checked to make sure you have the correct figures. Enter the total amount into the income statement as the selling and administrative expenses line item. It’s located directly below the gross margin line.
7. Calculate Your Income
Subtract the selling and administrative expenses total from the gross margin. This will give you the amount of pre-tax income. Enter the amount at the bottom of the income statement.
8. Include Income Taxes
To calculate income tax, multiply your applicable state tax rate by your pre-tax income figure. Add this to the income statement, below the pre-tax income figure.
9. Calculate Net Income
To determine your business’s net income, subtract the income tax from the pre-tax income figure. Enter the figure into the final line item of your income statement. This will give you a general understanding of your business performance, letting you see how profitable you have been.
10. Finalize the Income Statement
To finalize your income statement, add a header to the report identifying it as an income statement. Add your business details and the reporting period covered by the income statement. With all of the data you’ve compiled, you’ve now created an accurate income statement. This will give you a future understanding of income statement definition that will be of great benefit to you and your business practice.
Income Statement Example
This example of an income statement created by Finance Train can give you a better understanding of what’s reported on an income statement, the format and how the data should be laid out:
What’s the Difference Between a Balance Sheet and Income Statement?
There are a few key differences between the balance sheet and the income statement, including:
- Timing: While the income statement reports financial activity for a specific reporting period, usually a month, a quarter or a year, the balance sheet reports financial activity at a specific point in time, for a snapshot view of a business’s finances.
- Information reported: The income statement reports on a business’s revenues and expenses and ultimately the amount of profit or loss it generated, whereas a balance sheet reports on a company’s assets, liabilities and equity.
- Significance: The income statement is used to report the overall results of the business’s financial performance, or how much earnings it’s generating. The balance sheet is used to analyze whether a company has enough liquid assets to cover its financial obligations.
What is an income statement?
An income statement or profit and loss account is one of the financial statements a company requires to balance their accounting books and calculate the financial health of the company.
It shows the company's revenues and expenses during a particular period, which can be selected according to the company’s needs. An income statement indicates how the revenues are transformed into the net income or net profit.
A quarterly income statement shows the profits or losses generated by your business over a three month period. It can also be referred to as a profit or loss account, and is a crucial financial statement that shows the businesses income and expenditures, detailing your net income or net profits.
To learn more about income statements, visit the FreshBooks main page.