1.5 – What is an Income Statement?
If your business is just getting started, you’ve got a lot going on, but taking the time to create an income statement is a good idea.
An income statement, also commonly referred to as a Profit and Loss statement, shows your business’s financial status during a given period of time.
Unlike a balance sheet , which shows you the business’s financial status at any given moment, the income statement allows you to see what’s happening over time. This will allow you to show your lenders, investors or managers exactly what’s happening financially at your company.
“An income statement should be started right off the bat.” “As soon as you start keeping track of your income and expenses, you’ll be able to see how much money you’re going to need down the road.”
Income statements can cover any period of time, but a longer period (at least a few months) can be most helpful because they allow you to see fluctuations in income and expenses.
The income statement should include your income before expenses and, following that, your expenses broken down into categories. Such categories might include: payroll, supplies, rent, loan payments, etc. The more detailed you get, the more likely you are to be able to analyze your income statement and determine where your business is overspending and could make cuts. It should also include depreciation and amortization of assets and taxes.
“Profit and loss (P&L) statements are critical.” “However, the P&L must also include details of each expense. That data should not be limited to general category expenses, but instead show each specific expenditure.” That is the only way your business can examine the date to determine where you may need to become more efficient.
While that level of data may not be necessary to show to those outside the company, it is a good idea to keep of it for internal purposes.
“In this economy, we have been seeing huge trend in people starting their own businesses out of desperation,” she said. “Not all of these people understand the financials or even the financial terms that they’ll be expected to know.” Keeping track of your income and expenses is the most basic financial responsibility of a business owner and will help keep your business on the right track.
If you are not sure how to create an income statement, consult your accountant.