All companies need to prepare Income Statements to measure their capacity to generate profit. This is especially true of a small business, where the slightest decline in profit can have devastating effects. Yes, even a one-person company should generate an Income Statement every month and take proactive steps to remedy any problems that the statement brings to your attention.
The Income Statement is also called the Profit & Loss (P&L) Statement, reminding us that losses are part of the equation. In order to be profitable – simply put – you must stay out of the red and learn to identify trends that move your dial in the right direction. Your Income Statement provides a fantastic starting point for financial analysis.
Remind people that profit is the difference between revenue and expense. This makes you look smart. -Scott Adams
Why do we start businesses?
- to sell a product or service
- to invest
- to separate property from personal ownership
- to create a job for oneself
- to share intellectual property
- to fund hobbies
- to spend time and money
- to protect property
- to establish a mechanism to share an estate and
- the list goes on….
Much of the existing confusion in terms of profits rises from the two accepted formats of the Income Statement: single-step and multi-step. Single-step is simpler and does not give information about gross margin or pretax income. Multi-step includes itemized sources of revenue and expenditures.
Single-Step Income Statement
In the single-step format, Net Income is derived from this equation:
- NET INCOME = (REVENUE + GAINS) – (EXPENSES + LOSSES)
|
Single-Step Income Statement |
| Sales |
| Materials and Production |
| Marketing and Administrative |
| Research and Development Expenses (R&D) |
| Other Income & Expenses |
| Pretax Income |
| Taxes |
| Net Income |
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