How to Prepare an Income Statement? - 10 Easy Steps

Tis the season! Holidays have begun, and so is the shopping. Be it for family, friends, or business mates; everyone's on a shopping spree. Well, as much as we enjoy engaging in this blissful happy activity of gifting presents to each other, we know holidays come bearing major expenses and slow incomes. Therefore, estimating income and expenses becomes a mandatory task to follow, especially during the festivities. Initially, this may seem like an overwhelming feat to achieve. So, understanding how to prepare an income statement is essential whether you are a business owner or an accountant.

With these ten easy step-by-step guide on preparing an income statement that needs to be followed to create an accurate and efficient income statement, we are sure you'll enjoy the season evermore. As long as these guidelines are followed, it should become a much simpler process for all. In addition, preparing an income statement will help set a strong foundation for financial success and clarify how money moves throughout the business. So let's dive in and start with the nitty-gritty of preparing an income statement. Read more below.

What Is An Income Statement?

An income statement is an important financial document used to measure the profitability of a business. It captures how much revenue was generated and how much expenses were paid during a given period.

The primary purpose of an income statement is to show how well a company has managed its resources and how successfully it produces profits for its shareholders. To prepare an income statement, you will need to gather data regarding your company's sales, cost of goods sold, operating expenses, and other relevant costs that help determine the business's profitability. Once all the information has been gathered, it should be arranged into statements detailing how much money came in and went out.

By properly preparing an income statement each month or quarter, businesses can make informed decisions about improving their operations and profitability.

What Is Included In An Income Statement?

Making an income statement can be daunting for those unfamiliar with financial reports, but it need not be! An income statement also referred to as a profit and loss statement, outlines how much revenue has been made in a certain time period. It is an important document that details how money was earned and expenses paid.

An income statement typically consists of four key components:

  • Revenue
  • Operating costs
  • Non-operating expenses and
  • Net income.

Understanding how an income statement works can help ensure proper financial management. So let's take a deeper look at these four elements of curating an income statement and learn more about them.

Revenue By Category

Revenue by category is included in the Income Statement, which divides the company's total earnings into classifications such as

  • sales and service income,
  • rental income from leased properties,
  • interest earned from investments, etc.

This breakdown helps management and accountants get an accurate snapshot of where their money is coming from, which can help inform decisions about investments or other changes within the business.

Additionally, Revenue by Category gives investors more insight into how successful a business is by showing what sources are contributing most to its growth. Knowing this data allows them to project potential future performance and make informed investment choices.

Expenses By Category

The Expenses By Category portion of an Income Statement examines a company that has incurred what types of expenses during a predetermined time period. This includes operating and non-operating expense categories and provides insight into the factors affecting the business's overall profitability.

For example, Expenses By Category can show year-over-year changes in marketing costs, cost of goods sold, and employee payroll that may identify improvement or detriment to the bottom line. Additionally, it helps individual departments compare their financial performance with other operations within the same company by viewing these metrics over time.

Company Gains On The Value Of Assets

A company's gains on the value of assets is an oft-overlooked but important component of an income statement. Generally, this refers to the appreciation in the market value of an asset held by a company at a given time period.

For example, if Company A owned a piece of commercial real estate valued at $500,000 at the beginning of the year and was now worth $550,000, that gain on its value would be added to Company A's income statement as a positive number. This gain represents potential earnings the company can use to finance other expenses or increase profits; thus, it is essential to read when looking over any financial statement.

Losses Incurred Over The Same Period

The losses incurred over the same period are each unique to the company and reflect any huge expenses that have taken place to handle a new project or issue. Examples include settling customer or employee complaints and legal fees. Normally expressed as a negative number within the total amount earned, these losses accurately display how much money was lost during the given time frame and can be used for comparison purposes across years.

Why Should You Write An Income Statement?

Writing an income statement is a crucial part of running any business. It's often referred to as a "profit and loss" statement since it summarizes the revenue and expenses of your business for a particular period.

By reviewing this document, you can gain valuable insights into your business's performance and financial health. Not only does this provide essential information for running your operations on an everyday basis, but it also allows you to evaluate long-term strategies for profitability.

When preparing your income statement, include detailed categories that capture your business's revenues and expenses. You can then use these figures to create accurate forecast models that help plan for future growth or anticipate potential losses or changes in direction.

Difference Between Balance Sheet And Income Statement

A Balance Sheet is a financial overview that highlights the financial health of an organization by accounting for its assets, liabilities, and equity on any given day. It's an important tool that's used to understand the resources an organization holds and its short-term and long-term obligations. It also gives investors insight into a business's liquidity position by providing a snapshot of its financial health.

An Income Statement is a company's report showing its sales revenue, expenses, and profits for a specified period - generally over a year. It conveys how much money flowed into or out of business during the specific period in question, which provides investors with key insights into how well or poorly the company is performing financially.

Both these documents can be used to help determine the value proposition offered through investments in a particular business venture or opportunity.

The difference between a Balance Sheet and an Income Statement is:

  1. The balance sheet reports a company's assets, liabilities, and equity at a specific point in time. In contrast, the income statement reports a company's revenue, expenses, and net income over a particular period.

  2. Assets are items that a company owns and can use to generate revenue, while liabilities are debts that a company owes. Equity is the difference between a company's assets and liabilities.

  3. Revenue is the money a company earns from its operations, while expenses are the costs incurred to generate that revenue. Net income is the difference between a company's revenue and expenses.

  4. The balance sheet can be used to assess a company's financial health at a specific point in time, while the income statement can be used to assess a company's financial performance over a specific period of time.

  5. The balance sheet is typically prepared at the end of an accounting period, while the income statement is typically prepared quarterly or annually.

How To Write An Income Statement?

Writing an income statement can seem daunting, but it does not have to be. This document is one of the most important pieces of financial information an individual or a business has, as it is a snapshot of their finances and financial performance.

To write an effective income statement, you must collect all relevant information, such as revenue and expenses. Once that has been gathered, examine your records and determine which figures are essential to assess your financial standing. After you have calculated those figures, organize them in a way that clearly shows where your money is coming from, expenditures, profit, and other related details. But before jumping into this process, make sure you know what an income statement entails and understand its importance for making successful business decisions.

But while this is just a brief version for you to understand how to make an income statement, here is a step-by-step guide added below. Have a look:

Step 1: Pick A Reporting Period

To craft an income statement, you can simply start by choosing the reporting period for your statement—this could be for a month, a year, or another period, depending on the type of statement you are writing. Once you have determined the reporting period, determine the elements that need to be included in your report, such as revenue sources, expenses incurred and ending net income. Next, gather all relevant information for the reporting period you have chosen that is necessary for your calculation. With this data in hand, professionals suggest using a calculator or software to guide you through the important details before arriving at your final calculations.

Step 2: Generate A Trial Balance Report

Writing an income statement requires a few steps. After collecting all the necessary financial information to support it, generating a trial balance report is the next step. This is necessary to ensure accuracy in your calculations and that all of your accounts from the periodic activities are correctly accounted for. It also helps you ensure that all of your debits and credits are equal, as discrepancies can be spotted quickly when reconciling this report with the entire data set.

Taking the time to generate this report will help ensure that when it's time to prepare your end-of-period financial statements, your income statement contains accurate information.

Step 3: Calculate Your Revenue

Writing an income statement is a straightforward process, and Step 3 involves calculating each of your respective revenues. To accurately calculate your revenue, you will estimate the number of sales you've made in a given period and the prices you have charged. In addition, it's important to be precise with any customer discounts applied and the number of returns or refunds that may have impacted your income. Once you have all this data recorded, you will have successfully calculated your total revenue and can move on further in the process.

Step 4: Determine the Cost Of Goods Sold

Once you have calculated the gross profit margin, it's time to determine the cost of goods sold (COGS). COGS is an expense that includes costs to produce and store products that your business bought and sold. This can include materials and labor involved in manufacturing a product or inventory purchased wholesale. This figure should include something other than expenses for administrative costs, interest payments, taxes, or depreciation expenses which should be accounted for separately. It's important to remember these distinctions when putting together an income statement, as they each affect your net profit differently.

Step 5: Calculate The Gross Margin

By this point, you should have calculated your net sales from the top line of the income statement and your cost of goods sold (COGS) from the bottom. The next step is calculating the gross margin; this is simply the total net sales minus COGS.

To put it another way, it's a measure of how much money remains after covering lower-level expenses such as labor, materials, and overhead costs necessary to produce or purchase items sold. Once you have accounted for these costs, it becomes easier to see where some of your profits are going and make informed decisions on business strategy.

Step 6: Include Operating Expenses

When you have collected all the necessary data and calculated your sales and cost of goods sold, it is time to move on to the next step, including operating expenses. Operating expenses represent regular payments from running your business, such as rent, utility bills, salaries, administrative costs, taxes, and marketing expenses.

These expenditures should be listed in one place for a clear overview of their impact on profits. Don't forget to factor in depreciation or amortization of assets if applicable. Lastly, subtract operating expenses from your gross profit to complete the income statement—so that you can see how much profit you generated!

Step 7: Calculate Your Income

While calculating your income, your first goal should be to add up all of your revenue for the period you're analyzing. Calculate any money earned for that period due to sales, interest received on investments, or anything else coming in as income.

However, don't forget to subtract any taxes and fees from this total imposed on the revenue. Secondly, add up all expenses incurred during the particular period, such as costs associated with production, employee wages, etc. Lastly, subtract expenses from your calculated revenue to determine your net income to get a clear picture of the business's performance from an economic perspective.

Step 8: Include Income Taxes

Writing an income statement includes including income taxes in your calculations. It's important to remember that all of your income earned must be reported, so it's important to include the financial burden that income taxes put on your overall financial statement. Ensure you're accurate in your calculations and keep up to date with changes in tax law and regulation that can affect how much you owe. Inaccurate taxes can lead to hefty fines, so double-check your work before filing.

Step 9: Calculate Net Income

In constructing an income statement, a company's net income must be calculated. This calculation is done by subtracting total expenses from total revenues. The data used to calculate net income should be taken from the earlier steps in the process, such as-- when operating expenses, depreciation, and interest expense are subtracted from sales revenue to determine gross profit/loss. Once this final calculation has been made, the business's net income will be known and can be used for financial reporting and analysis.

Step 10: Finalize The Income Statement

The final step in writing an income statement is to review and adjust as needed.

  • First, confirm that all of the numerical figures add up correctly. Then, check if the way that items are classified is accurate according to accepted accounting standards and worksheets.
  • Going forward, tracking a company's income statement regularly may be beneficial—with each new period, you can compare income from one period to another and make decisions regarding the budget or investments accordingly.
  • Remember that while writing your final income statement, make sure to date it accordingly, put correct titles or headings, and have everything written in black ink as part of common practice.

Best Practices While Preparing An Income Statement

An income statement helps businesses track revenues and expenses. It is useful for both assessing the overall performance of a business, as well as preparing reports to shareholders and government agencies. To ensure accuracy and completeness, those responsible for preparing an income statement must follow best practices guidelines. These include:

  • Creating a detailed budget with documentation, using GAAP rules when compiling data,
  • Regularly reconciling account balances and following up-to-date accounting principles when making decisions or compiling information.

When correctly implemented, these best practices ensure that an income statement accurately reflects the fiscal activity of a business over time.

How Can Fincent Help You Prepare Your Income Statement?

Fincent is a revolutionary financial management tool that can help you easily and quickly prepare your income statement. Fincent makes it easy to organize information regarding money in and out of your business by tracking all deposits, payments, investments, and expenses. It also helps you generate reports and make decisions based on financial insights. Furthermore, Fincent's automated data entry feature ensures that all income statement entries are accurate and up-to-date to help you comply with industry regulations.

Some of the more extraordinary ways in which Fincent can be your go-to tool for all thing money and finance are:

Helps You Calculate Net Income Automatically

With Fincent, you can automatically calculate net income by subtracting total expenses from total revenues. Fincent will do all the work for you, preventing potential mistakes and omissions that can be costly in the long run.

Generate Reports to Identify Trends and Inconsistencies

Fincent's reporting capabilities help you identify trends and inconsistencies in your finances that can indicate potential issues or growth opportunities. This will enable you to make more informed decisions about the future of your business.

Store Past and Present Financial Data for Comparison At Any Time

Fincent's cloud storage allows you to compare past and present financial information. You can access this data at any time, allowing you to compare current income statements with past ones.

Access Your Financial History From Anywhere At All

Fincent's cloud storage also allows you to access historical accounts, invoices, documents, and more from any device with an internet connection. This convenient feature helps you stay organized and up-to-date on your business's financial activity.

Automate Data Entry Processes To Save Time and Effort

Fincent's automated data entry feature allows you to save time and energy by automatically entering financial information into your income statement. This eliminates the need for manual entry, minimizing errors and omissions.

Facilitate Better Decision-Making With Real-Time Data and Insights

Fincent's insights feature helps you make better decisions by providing real-time financial data and insights. This allows you to quickly analyze your finances and identify potential issues or opportunities for growth.

With Fincent, businesses can easily and quickly prepare an accurate income statement that complies with industry regulations and best practices guidelines. So whether you're looking to compare past financial data or stay in compliance with accounting principles, Fincent is the tool to help make it all happen!

Winding Up!

Income statements are one of the most important documents for any business, reflecting a company's financial activity. However, to ensure that an income statement is accurate, companies must follow industry guidelines and best practices such as using GAAP rules, regularly reconciling account balances, and staying up-to-date on accounting principles.

Fincent can make preparing your income statement easier by providing automated data entry, reports, and insights to help identify trends and inconsistencies in your finances, cloud storage so you can access past and present financial data, and real-time data & insights to facilitate better decision-making. With Fincent, businesses can easily prepare an accurate income statement that complies with industry regulations in no time! Try Fincent by simply signing up and requesting a demo for Free. Once you venture out Fincent and its capabilities, we are certain there is no looking back. Now take control of your finances like never before!