In this article I will discuss the specific details of the income statement. I will incorporate its general format. Also, I will identify its purpose. More specifically I will make a comparison between the purpose of this document and the purpose of a balance sheet. In addition, I will describe its different aspects, in other words, what an income statement consists of.
To begin, I will compare the purpose of an income statement to the purpose of a balance sheet. An income statement is essentially a report of a company's income or losses over a certain period of time. On the other hand, the purpose of a balance sheet is to review the financial position of a company at one point in time. For example, a company will produce a balance sheet at the end of each month or at the end of every quarter, depending on the system through which a company chooses to operate.
Now I will discuss the breakdown of an income statement. I will identify the specific aspects of this financial document and how the aspects are related, as well as illustrate its general format. The top of the income statement is generally where the business's name will be found. Also, positioned at the top of this document will be the actual words "Income Statement," in addition to an indication of the time when the information shown on this financial statement is valid. For example, if Google Inc. were to make an income statement, shown on the top of the document would be the words, "Google Inc." Directly below the name of the company would be the words, "Income Statement." If the document provided accurate financial information pertaining to the month of September 2010, the words "For Month Ended September 30, 2010" would appear directly below "Income Statement." Typically the company's name would be larger than the words "Income Statement," as well as the indication of the time that the financial information was intended to reflect.
The general essence of this financial report is expenses subtracted from revenue. However, this format is only used for a single-step income statement. Before discussing the substance of a multiple-step income statement, I will further examine the single-step version of this document. The revenue, included in this financial statement, is many times broken down and categorized into different sections. For example, revenue can be divided into net sales and rental revenue, or even landscaping fees, depending on the operations of the company that is producing the report. To be more specific, the amounts associated with each type of revenue will be placed on the account as a credit. Also, the expenses of a company will, in most cases, be broken down into different categories. For example, every company will have an insurance expense and wages expense. Depending on what type of business the company is involved with, each company's expense section will look very different, displaying multiple categories, devoted to different types of expenses. Unlike in the revenue section, the dollar amounts associated with each expense will be placed on the account as a debit. After each section of the income statement (the revenue section and the expense section), the categories created to reflect the different types of revenues and expenses would be accumulated and totaled. At the bottom of the revenue section, the words, "Total Revenues" would appear. Following the same method as the revenue section, at the bottom of the expense section, the words, "Total Expenses" would appear. Like each section's respected categories, in which the revenues and expenses are broken down and separated, the totals are also debited or credited accordingly. For example, "Total Revenues" is credited under the account, whereas "Total Expenses" is debited under the account. To finalize this financial statement, at the very bottom of the document, there will be a section identified as, "Net Income" or "Net Income/Loss."
To conclude this article I will briefly explain the basics of a multiple-step income statement. This specific type of the financial report is very different in format from the single-step income statement because multiple-step income statements separate the operating revenues/expenses from the non-operating revenues/expenses. Also, "Gross Profit" appears on this version of the document, computed by the subtraction of the Cost of Goods Sold from Net Sales. Gross Profit is credited onto the account. Single-step and Multiple-step income statements, however, do share many similarities, including the format of the header of the document, in addition to the applied system of debits and credits.