An income statement is a type of financial document that shows how much of a profit or loss a business had during a specific time period. In its most basic form, an income statement calculates the amount of total revenue (sales plus other sources of income) and subtracts the amount of total expenses (cost of products / services sold plus other operating and administrative expenses).
If the total revenue is more than total expenses, the business has turned a profit. If it is less, the business has suffered a loss.
An income statement can also be known as a profit and loss statement, statement of income, net income statement, or statement of earnings. It is one of the core sources of financial data on the health and performance of a company, and is leveraged to make a variety of strategic and investment decisions.
There are two main types of income statements used by businesses:
Single-step income statements, which calculate income with a more simplistic formula grouping all financial gains and all financial expenses into single line items. Because of the streamlined nature of single-step statements, they are used mostly by sole proprietorships and other small businesses.
Multi-step income statements, favored by larger companies or companies with more than one line of business, break out sources of revenue and expenses into operating (activities related core business functions) and non-operating (activities that are outside of the core business functions) categories. Non-operating activities may include selling or buying assets, investment gains (or losses), or legal fees and payouts.
There is no one-size-fits-all template for income statements, and companies can include many different things, depending on their industry and type of business. The main requirement is that the information presented is complete, accurate, and follows generally accepted accounting principles (GAAP).
In addition to balance sheets and cash flow statements, income statements are critical pieces of financial information for a company. While balance sheets show assets and expenses as a snapshot of a single date in time, income statements reflect specific time periods, such as months or even years, which make it possible to detect past and current trends and predict future performance.
Additionally, income statements can be used by businesses to:
Income statements are also used by shareholders and investors to determine whether to invest in a company, or to continue a current investment. A company may struggle to raise capital, either from private investors or financial institutions, if its income statement does not show enough profit.
Likewise, in a publicly traded company, stock prices may fall (or be sold off in large quantities) if losses grow and / or growth slows year to year.