Income statement also referred as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement operations is a company's financial statement that indicates how the revenue is transformed into the net income. The income statement records all revenues for a business during the given period, as well as the operating expenses for the business.
The income statement is one of the major financial statements used by accountants and business owners. The income statement is important because it shows the profitability of a company during the time interval specified in its heading. The portion of the income statement that deals with operating items is interesting to investors and analysts alike because this section discloses information about revenues and expenses that are a direct result of the regular business operations.
The non- operating items section discloses revenue and expense information about activities that are not tied directly to a company's regular operations An Income Statement can be broken down into 3 main components: Revenue, Expenses and Net income that has been recorded in the financial books during the specified time.The important thing to remember about an income statement is that it represents a period of time. This contrasts with the balance sheet, which represents a single moment of time.
Preparation of Income Statement
The income statement can be prepared under two methods. The single step income statement takes a simpler approach, totaling revenues and subtracting revenues to find the bottom line.The more complex Multi- Step income statement takes several steps to find the bottom line, starting with the gross profit. It then calculates operating expenses and when deducted from the gross profit, yields income from operations. Adding to income from operations is the difference of other revenues and expenses. When combined with income from operations, this yields income before taxes. The final step includes deduction of taxes, which finally produces the net income for the period measured.
Usefulness and Limitations of Income statement
Income statements should help investors and creditors determine the past financial performance of the enterprise, predict future performance and assess the capability of generating future cash flows through the income and expenses report. More often than not, investors make decisions based entirely on the reported earnings from the income statement without consulting the balance sheet or cash flow statements.
However it has its own limitations like items might be relevant but cannot be reliably measured are not reported and some numbers depend on accounting methods used and on judgments and estimations.