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Small Business Tips

How to Prepare an Income Statement

Manasa Reddigari

An income statement is an important document for your company's financial health. Yet, many small business owners stumble when preparing it. Read on for help in preparing your own income statement.

What is an income statement?

An income statement is a report of revenues generated and expenses incurred by your business. It's recorded over the course of a year, a month or a quarter. This statement is sometimes called a Profit and Loss statement.

An income statement gives you a good look at the financial health of your business. It can also give investors a good idea of business performance.

It allows you to adjust your business accordingly. Income statement not meeting expectations? Maybe you can lower expenses or increase revenue. These actions can lead to positive business outcomes over time.

What should an income statement include?

The header of the income statement usually includes three separate lines. These include the words "Income Statement" on the first line.

Next up, write your business name. On the third line, write the dates of the accounting period that the income statement will cover.

If your business is publicly traded, the Securities and Exchange Commission provides specific requirements. Otherwise, you can define an income statement period that suits your needs.

How to prepare the body of the income statement

The first section, usually titled Revenue. This lists total sales revenue earned during the period, the total cost of goods sold and Gross Profit or Loss.

Sales revenue includes any amounts earned from the sale of goods or services. Cost of goods sold includes any costs involved in the production or inventory (or the purchase of inventory if you operate a reselling business.)

Calculate Gross Profit by subtracting the cost figure from the revenue figure.

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Operating expenses

The Operating Expenses section provides a categorical listing of total expenses followed by the Operating Income. These expenses should only include items related to directly administering your business.

List each expense category on its own line. Then, write the cumulative amount of expenses incurred in that category over the income statement period.

Sum up the total operating expenses and subtract this figure from the Gross Profit figure to get the Operating Income figure.

Non-operating expenses

Next up are the Non-Operating Expenses. Each line of this section should list the total expenses incurred for a category of expenses not directly tied to business administration. Fees from litigation are non-operating expenses.

The next section, usually titled Non-Operating Revenues, should list categories of revenues indirectly related to business administration and Non-Operating Income on separate lines. For example, revenues from interest are one type of non-operating income. Subtract Non-Operating Expenses from total Non-Operating Revenues to get Non-Operating Income.

The Additional Income section comes next and lists revenue and expenses on two separate lines. These revenues and expenses would cover activities not covered in either the operating or non-operating sections.

The final line of the statement should contain the Net Income figure for the accounting period. Get this figure by adding up the Operating and Non-Operating Income figures from earlier sections.

What other financial documents are useful?

Along with the income statement, a balance sheet and cash flow statement can provide an overall picture of the health of your business. A balance sheet shows what assets your business has versus the liabilities and equity at a given point in time. Similarly, a cash flow statement shows both your assets and your debts on a quarterly basis.

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