Income Statement
(P&L or Profit & Loss Statement)What is an Income Statement
An income statement is a financial report that shows how the business performed during the accounting period.
![is1](https://seeaccountingnow.online/wp-content/uploads/2020/04/is1.jpg)
How it Works
At the end of each accounting period, a business will prepare an income statement.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/is2.jpg)
The aim of the report is to show how the business performed during the accounting period.
![is3](https://seeaccountingnow.online/wp-content/uploads/2021/06/is3.jpg)
Management and analysts use the report to compare performance from one period to the next
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/is4.jpg)
They may be interested in revenue growth.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/is5.jpg)
Or they may be interested in particular expenses.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/is6.jpg)
Whatever the case, they will use the current information as a basis for predicting future trends.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/is7.jpg)
Preparing an Income Statement
Single Step Income Statement
The information for the report comes from the income and expense accounts.
![is8](https://seeaccountingnow.online/wp-content/uploads/2021/06/is8.jpg)
With a single step income statement, you take revenue, which is often referred to as the top line.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/is9.jpg)
From this, you deduct all expenses.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/is10.jpg)
This will show net profit, which is often referred to as the bottom line.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/is11.jpg)
Multi Step Income Statement
Revenue
A multi-step income statement separates operating revenue from non-operating revenue.
![is12](https://seeaccountingnow.online/wp-content/uploads/2021/06/is12.jpg)
At the top, the statement shows sales.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/is13.jpg)
Below this, it shows the gross profit calculation.
![is17](https://seeaccountingnow.online/wp-content/uploads/2021/06/is17.jpg)
The gross profit calculation begins with the cost of goods sold calculation (See C.O.G.S)
![is15](https://seeaccountingnow.online/wp-content/uploads/2021/06/is15.jpg)
All the steps involved in this calculation are laid out on the statement.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/is16.jpg)
Once calculated, it deducts C.O.G.S from sales to arrive at gross profit.
![is14](https://seeaccountingnow.online/wp-content/uploads/2021/06/is14.jpg)
Again, this is shown on the income statement.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/is18.jpg)
Next, the multi-step income statement shows non-operating revenue.
![is19](https://seeaccountingnow.online/wp-content/uploads/2021/06/is19.jpg)
This includes things like interest income or the profit from the sale of an asset.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/is20.jpg)
Like all other revenue items, this amount is also recorded in the top section of the income statement.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/is21.jpg)
Expenes
As with revenue, the multi-step income statement separates expenses into operating expenses and non-operating expenses.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/is22.jpg)
Operating Expenses
Operating expenses include things like payroll, advertising, marketing, rent, and insurance.
![is28](https://seeaccountingnow.online/wp-content/uploads/2021/06/is28.jpg)
They are the expenses necessary to generate sales.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/is24.jpg)
On the income statement, these expenses are listed under operating expenses.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/is25.jpg)
They are listed in 3 categories: selling & distribution; general & administrative; financial.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/is26.jpg)
Non-operating Expenses
So far, the top part of the income statement showed gross profit.
![is27](https://seeaccountingnow.online/wp-content/uploads/2021/06/is27.jpg)
After that, it showed operating expenses.
![is28](https://seeaccountingnow.online/wp-content/uploads/2021/06/is28-1.jpg)
The difference between gross profit and operating expenses is known as income from operations.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/is29.jpg)
After operating expenses, the statement lists non-operating expenses.
![is30](https://seeaccountingnow.online/wp-content/uploads/2021/06/is30.jpg)
These include things such as loss on sale of asset.
![is31](https://seeaccountingnow.online/wp-content/uploads/2021/06/is31.jpg)
Finally, the income statement shows net profit or net income for the period.
![is32](https://seeaccountingnow.online/wp-content/uploads/2021/06/is32.jpg)
© R.J. Hickman 2020