An income statement helps an entrepreneur see how much money he or she has earned during the previous month. Rather than focusing on gross profit, the income statement explains exactly how much money was earned, how much money goes toward paying for inventory and expenses, and how much is left over to carry into the next month. Since the income statement helps to calculate net profit each month, it is a critical accounting statement for businesses of all sizes.
Getting the Numbers
Before you can begin preparing an income statement, you need to calculate a few important figures, including your net sales and your cost of goods sold. You'll use these numbers to arrive at your net income during the preparation of the income statement. You'll only need to calculate cost of goods sold if you operate a retail business that purchases inventory for resale. Additionally, if you manufacture goods for sale, you'll also need to figure the cost of your raw materials, the value of your inventory that has not yet been completed, and the value of the inventory you currently have available for sale.
How to Prepare Your Income Statement
Now that you have the necessary figures, you can prepare an income statement. Begin by taking the amount of your net sales and deducting the cost of goods sold. The amount that remains will be your gross profit, or the amount of earnings that you received during the past month.
To arrive at your net income, however, you'll have to take your gross profit and deduct your operating expenses for that month. Operating expenses include the typical costs you spend to keep your business running, including rent, employee wages, and repairs. The amount that remains is your net income, or the amount of earnings you have left once you have deducted all of your necessary expenses. If your expenses are more than your income, you will show a net loss.
Use Caution When Distributing Income Statements
Income statements are often made available to the public, especially if you'll be seeking investment capital from other individuals. In this case, it may be best to avoid itemizing your operating expenses so that you don't give your competitors a view at how you're using your income. Rather than listing each expense on the public copies of your income statement, you may find it best to simply group all of the costs into one item called "Business Costs".
Preparing an income statement can be done easily if you take the time to calculate your necessary amounts in advance. With a properly completed income statement, you'll find it easy to evaluate your cash flow at any time.
