Income Statement Format: Steps For Creation

Income Statement Format: Steps For Creation

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Jaya
Jaya Sharma
Assistant Manager - Content
Updated on Sep 21, 2023 01:30 IST

Income statement is one of the three main financial statements that are used by companies for assessing their financial situation. This financial statement is also known as the Profit and Loss statement.

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In this article, we will be discussing the income statement format to understand how this financial statement is created.

Table of Contents

What is an income statement?

The income statement is one of the core financial statements of the company in which the profit and loss of the company are also reported. Here, profit and loss are determined by considering the revenue and subtracting every expense from both operating and non-operating activities. 

It is one of the three financial statements that are used in both accounting and financial modelling. Here, the income statement displays the costs, revenues, administrative expenses, gross and net profit. It is considered to be the predecessor of the balance sheet and cash flow statement. Since it requires less information than cash flow statements and balance sheets, it can help in building a financial model. 

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Importance of Income Statement

Through income statements, business owners can decide whether they can generate profit by either increasing revenues or by decreasing the cost. Through income statement, companies can analyze the effectiveness of the strategies that the business have set at the start of a financial period. Unlike other financial statements, the income statement is generated on either a monthly or quarterly basis. This helps business owners as well as investors in closely tracking the performance of the business and making informed decisions.

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Learning the Income Statement Format

Add a header to this financial statement identifying it as the income statement. After that, add business details and reporting period that have been covered by the income statement. The following steps are to be followed while you start learning the income statement format. 

1. Deciding the Reporting Period 

The first step in learning in an income statement format is the reporting period of the statement. This reporting period may be on a monthly, quarterly or annual basis. Based on the size of the company, the report can be created on a monthly or quarterly basis. However, a monthly income statement helps in identifying trends in profit or expenditure. Based on this information, one can make business decisions that will help in making your company more profitable.

2. Generating the Trial Balance Report

For generating the income statement for the business, it is important to print a standard trial report. For this purpose, you can use cloud-based accounting software so that you can generate the trial balance. Trial balance reports refer to the internal documents that list end balance of every account in the general ledger for a specific reporting period. To gather data for their account balances, companies need to create balance sheets which is important for creating income statements. This provides you with the end balance figures that you require for creating an income statement.

3. Calculating the Revenue

The next step of the income statement format is calculating the total sales revenue of the business for a reporting period. It includes the money earned for all services during the reporting period irrespective of receiving the payment. For this, add up all revenue line items from the trial balance report and enter the total amount in the revenue line item of the income statement. 

4. Cost of Goods Sold (COGS)

It refers to the Cost of Goods Sold that is part of the income statement. This is the direct cost incurred in producing goods or in keeping inventory. This does not include other overhead expenses that are related to the general business operations. When COGS exceeds the revenue generated by a company in a reporting period, then the company has made no profit. COGS helps in analysing how payroll costs and purchasing are being controlled.

5. Gross Profit Margin

It is a metric that helps in assessing the financial health of the company. For this purpose, the company calculates the amount of money remaining after reducing the COGS from the sales of the product. This figure is divided by net sales for expressing the gross profit margin which is expressed as the sales percentage. 

6. Operating Expenses

Operating expenses are also known as the selling, general and administrative expenses (SG&A). These are the cost of conducting business which includes rent, utilities, marketing, advertising, management, sales and accounting. These are overhead in nature and represent fixed costs since they are not directly linked with the sales of goods and services.

Add up every operating expense that has been listed in the trial balance report. Double-check every expense line to ensure that you have got the correct figures. Now enter the total amount into the income statement as the selling and administrative expenses line item which will be located directly below the gross margin line. 

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7. Calculating the Income 

The next step in the income statement format is calculating the income and income tax. Now, subtract selling and administrative expenses from the gross margin to get the pre-tax income amount. You will have to enter this amount at the bottom of the income statement. Now, multiply the applicable state tax rate with the pre-tax income figure and add this below the pre-tax income figure in the income statement.

Another crucial detail that you have to include in the income statement format is the net income. You need to subtract the income tax format the pre-tax income figure. Now, enter this figure into the final line item of the income statement. This will help you in assessing the performance of your business and identify whether or not your business is profitable.

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FAQs

What is the difference between a single-step and multi-step income statement?

Single-Step Income Statement format aggregates all revenues and subtracts all expenses to find the net income in a single step. Multi-Step Income Statement format separates operating revenues and expenses from non-operating ones, providing a more detailed view of a company's financial performance over a period.

What are Operating Expenses?

Operating expenses are the costs associated with running the day-to-day operations of a business. These can include selling expenses, administrative expenses, depreciation, and other operational costs.

Can an income statement show negative net income?

Yes, an income statement can show negative net income, indicating that the company incurred a net loss during the period. It happens when the total expenses exceed the total revenues.

About the Author
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Jaya Sharma
Assistant Manager - Content

Jaya is a writer with an experience of over 5 years in content creation and marketing. Her writing style is versatile since she likes to write as per the requirement of the domain. She has worked on Technology, Fina... Read Full Bio