One of the three most important financial statements is the Income statement. It is where revenues, expenses, and overall profits or losses are reported for only a specific period. Here, all the costs that contribute to the final earnings are evident, which is also known as the profit-and-loss statement.
The Components of Income Statement
- Sales Revenue. Found on the topmost part, this reports the total revenue of the company’s sales and services.
- Cost of Good Sold (COGS). Also called Cost of Sales for service businesses, this component reports the overall direct costs of selling the products to gain revenue.
- Gross Profit. It is the overall net profit generated from subtracting CGS from Sales Revenue.
- Marketing, Advertising, and Promotion Expenses. These components are standard because of their direct relation to selling.
- Operating Income. Simply put, this represents the profit generated during regular business operations, or before interest, taxes, and non-operating expenses and Income are taken away.
- Earnings Before Tax (EBT). Operating Income less Interest Expense, you get EBT. It is also known as pre-tax Income and the final stop before the Net Income.
- Income Taxes. These are the taxes charged on EBT and may include both future and current taxes, and finally ;
- Net Income. The final amount that goes as retained earnings on the balance sheet after dividends are subtracted. Take away the income taxes from the EBT, and you get the Net Income.
The Importance of Income Statement
Because it provides a wide array of sequences of things, the income statement enables business managers and owners to make crucial decisions regarding the company’s operations, the management’s efficiency, their performance compared to other industry players, and the possible danger areas wherein profit may diminish. It reports the business’s overall profitability, and thus, it is just as important as the company’s growth or loss for an extended period.
Furthermore, the income statement may also be used to analyze how the business can turn expenses to earnings or revenues. From this aspect will arise significant steps to advance the company, such as whether to invest in new things, further explore and penetrate the market, or cut down some operations that are no longer serving growth to the company. Simply put, an income statement summarizes the expenses and revenues contributing to the final profit or loss for a period. Then, from here will serve as a basis for managers and owners to make decisions for the firm’s overall advancement.
Who Needs It?
All businesses need to come up with a very well-written and analyzed income statement. Failure to do so could positively put the company at financial risk or loss. So business owners must be able to put this task in the hands of only a reliable, professional, and trustworthy accounting firm.
At JD Tax and Accounting Services, we guarantee you the best and most professional service of all. We always put our client’s interests at heart and give them the service they fully deserve. To ensure we have provided the cleanest and most credible financial statements to our partners is our ultimate goal. What are you waiting for?
Please book your FREE consultation with us now and get the service that you 100% deserve!
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