In business, the losses and profits are very important because they determine how well the business proceeds. To find out what these are, you need to keep track of your revenues and expenses. The best way to do this is by preparing an income statement.
By definition, an income statement is a document that contains all the information about the expenses and income of a business. This statement is made for a certain period of time, but this period needs to be specified. It can be monthly, quarterly, or even annually. Businesses have the freedom of choosing the time period as required. However, for loan applications, you will be required to provide an income statement of an annual period. Some lenders may even need statements from the past two years.
Regardless of the reason as to why you would like to make an income statement, it is more important to know how to make it perfect. In this article, we will discuss the elements involved in an income statement and will give you a step-by-step guide on how to draft it, and finally, will provide you with income statement templates that will ease the process.
Basic Elements of an Income Statement
There are two elements involved in an income statement namely, revenue and expenses. The revenue is the money that the business receives from all sources. In making the income statement, the revenue is reported when the business does its part, not when the client pays. As soon as your business provides the client with your services or goods, you need to report this as revenue in the income statement. But this is only one type of revenue called operating revenue.
Another type is non-operating revenue which is obtained from sources like rent on subleased space or interest paid by people paying off loans given to them by businesses.
The last kind of revenue is one that comes from selling the company’s assets or other gains. In this case, what is reported as revenue is the surplus after subtracting what the asset’s value was to the company.
Expenses refer to the money spent with the aim of creating revenue for the company. It is any form of liability incurred by the company and it needs to be included in the income statement even before the money is disbursed from the company’s account. It is important to note that not every payment that leaves the company is regarded as an expense. A good example is paying the principal of a loan.
There are several kinds of expenses that can help you understand better what is regarded as an expense and what is not. One is the operating expenses which are used in the day-to-day running of the business. These include what is used in marketing, buy goods, and paying workers, insurance, utilities, rent, and so on.
Non-operating expenses include interests that the business pays to banks and other lenders it may owe money to.
Losses are the final type of expense. This is the difference between the asset’s value and the proceeds it gives.
Methods of Creating an Income Statement
There are two methods you can use when preparing an income statement manually.
Single step method
This method is really simple and quick to know about how good or bad your business is doing. This method is suitable for service-providing businesses.
Step 1: List all your revenue and expenses in separate categories.
Step 2: Add up all the expenses and losses (sum 1) and separately add up all the revenue and gains (sum2).
Step 3: Find out the net income but subtracting the result of (sum 1) above from that of (sum 2). A positive answer will show the net income of the business (doing well) while a negative income will show the net loss of the business (doing badly).
Multiple step method
Using this method, you will be able to tell which type of expense and revenue is doing well or bad and to what extent. This method is ideal for inventory-keeping businesses. Follow the steps below to create an income statement this way.
Step 1: segregate the expenses and revenue into different categories. Ensure the operational expenses and revenue are separate from others and add each category up.
Step 2: calculate the gross profit by subtracting the total cost of goods sold from the total expenses.
Step 3: use the other categories of expenses and revenue to calculate the cost of factors involved in the selling of goods and their purchase.
Step 4: sum up all expenses and subtract this from the sum of all revenue to find the net loss or profit for the given time frame.
An Easier Way: Use Income Statement Templates
Preparing an income statement should not be too hard. Here, we have more than five templates that can ease the work and take the stress off your back. Just download an income statement template that suits your business and use it to easily prepare an income statement. These templates are easy to use.
Free Income Statement Templates
Monthly Income Statement Template (Excel)
Yearly Income Statement Template (Excel)
Template for Microsoft® Word
Final Words
An income statement is very important because it helps businesses when they seek financial support and to plan for the future. Ensure that you always keep track of the expenses and revenues so as to know how your business is doing. With our income statement templates, you will find it really easy to do all this.
