An income statement is a document which is prepared either every month or each year, that reveals the profit of a business, by reporting all relevant income and the expenses incurred to generate that income. The income statement is more commonly known as a profit and loss statement.

The income statement uses information from revenue, capital, expenses and the cost of goods to illustrate how much profit a company is making, or perhaps losing during the year. The report will show when sales are made and when the business incurs expenses.

A cash flow statement shows when expenses are paid for and when revenue is collected, while an income statement doesn’t show these details. An income statement will indicate the likely profitability during the specified period of the plan. If an income statement is generated as part of a business plan, the statement should be produced monthly for the first year, every quarter for the second year and on a yearly basis thereafter. Comparison of income statements over a period of time will help recognise a trend in operational delivery. Future goals and strategies may be planned using information gleaned from your income statements.

Although an income statement records revenue in monetary terms, this figure doesn’t represent the amount of cash that a company has, as the figure on the income statement includes payments received and payments that have yet to be made for goods and services purchased using credit. This is referred to as the accrual basis of accounting.

Want to learn more?

Subscribe to our newsletter to get accounting tips like this right to your inbox