Accounting 101
The Income Statement

1.  Introduction

In this Accounting 101 The Income Statement blog I want to discuss the importance for every business owner to not only have an income statement, but also know how to read and interpret their income statement – you may know it as a profit and loss statement...

Recently a small business owner asked for an hour of basic accounting consulting time to help her with her “out of control expenses.”  To prepare for the meeting I asked her to send me her financial statements. Imagine my surprise when she said she doesn’t have a bookkeeper and therefore has no financial statements.


2. Accounting 101 The Income Statement

As mentioned above, we are focusing on the income statement in this blog. Every business owner should be using their income statement to track revenues and expenses so that they can determine the operating performance of their business over a period of time.

SMBs (small to medium-sized businesses) should use their income statement to find out what areas of their business are over budget or under budget. Specific items that are causing unexpected expenditures can be pinpointed, such as phone, mail, print, or supply expenses. Income statements can also track dramatic increases in product returns or cost of goods sold as a percentage of sales. They also can be used to determine income tax liability.

Your business's income statement is one of four key financial statements which most companies use to measure their profitability and over-all, financial stability. These four statements include the:

·        balance sheet

·        income statement (or profit and loss statement)

·        cash-flow statement

·        statement of changes in equity   

As we know in Accounting 101 the income statement is one of the most important financial statements for a business owner to keep an eye on. From an overall accounting perspective, knowing how to read and interpret your income statement help business owners to better formulate an intelligent, differentiating net income comparison between specific periods of operation records. 

This very important business financial statement compares the current year's income and expenses to those of the previous year.  When this financial statement is read properly, the recorded data helps you to decipher whether or not your business is making money the way it should be.  The income statement gives you, as the business owner or bookkeeper/accountant, an idea as to what is making your business money and what is losing money.   

In Accounting 101 the income statement measures a certain period of time in which a business operates including monthly, quarterly or annually.  Of course, your business never stops operating, but the income statement is a good comparison tool for figuring net income increase or decrease per statement period.

What is ideal for these comparisons is a steady net income growth realization.  If you find there are more credits to debits, the business's net income increases. In other words, your business is doing well.  However, if there are more debits to credits, the business experienced a net loss, causing over all business assets to decreases. When this happens, your business is not doing so well.

When reading your business's income statement, keep in mind that the document will be broken down into several detailed parts.  This may sound intimidating but breaking the income statement into manageable chunks of information makes it easier for you to read and interpret the statement.

The important task of reading and interpreting the income statement is at the core of understanding your financial situation and the principles of Accounting 101. Your business's income statement should include separate sections on:

·        income from continuing operations

·        discontinued operation income

·        unusual or infrequent income

·        income from change in accounting principles

·        net income

·        other income

·        earnings per share

Revenues from the continuing operations section is the most important part of any business's income statement. Results from this section can predict your company's future earnings when compared to past continuing operations net income or net losses.  The items included in your business's continuing operations involve revenues from sales of  your company's products or services, costs of the products or services, operating expenses such as utilities, rent and HVAC, income tax expenses and gains or losses of revenue during business operations. 

3. Summary

In Accounting 101 the income statement is a fundamental statement that all business owners should grasp and know how to use to to track their businesses revenues as well as expenses. That will equip them with the necessary information to determine the operating performance of their business over a period of time.


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