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Understanding an Income Statement (Definition and Examples)

How profitable is your business? The only way to really know is to create an income statement.

Here’s how to put one together, how to read one, and why income statements are so important to running your business.

What is an income statement?

An income statement is a financial statement that shows you how profitable your business was over a given reporting period. It shows your revenue, minus your expenses and losses.

Also sometimes called a “net income statement” or a “statement of earnings”, the income statement is one of the three most important financial statements in financial accounting, along with the balance sheet and the cash flow statement (or statement of cash flows).

Small businesses typically start producing income statements when a bank or investor wants to see how profitable their business is.

When a business makes an income statement for internal use only, they’ll sometimes refer to it as a “profit and loss statement” (or P&L).

Income statement example

Here’s an income statement we’ve created for a hypothetical small business—Coffee Roaster Enterprises Inc., a small hobbyist coffee roastery.

Coffee Roaster Enterprises Inc.

Income Statement

For Year Ended Dec. 31, 2018

Category Amount
Sales Revenue $57,050.68
Cost of Goods Sold (COGS) $24,984.79
Gross Profit $32,101.89
General Expenses $11,049.55
*Rent $9,000.00
*Bank & ATM Fee Expenses $9.43
*Equipment Expenses $742.40
*Marketing Expenses $503.53
*Merchant Fees Expenses $794.19
Operating Earnings $21,052.34
Interest Expense $5,000.00
Earnings Before Income Tax $16,052.34
Income Tax Expense $10,000.00
Net Profit $6,052.34

Income statements are designed to be read top to bottom, so let’s go through each line, starting from the top.

Further reading: How to Read (and Understand) an Income Statement

Sales revenue

Every income statement begins with your company’s revenues.

How you calculate this figure will depend on whether or not you do cash or accrual accounting and how your company recognizes revenue, especially if you’re just calculating revenue for a single month.

Generally speaking, this figure will simply represent your total revenue for whatever time period the income statement is covering. (In this case, the time period is the year ending on December 31, 2018.)

Cost of goods sold

Often shortened to “COGS,” this is how much it cost to produce all of the goods or services you sold to your customers.

COGS only involves direct expenses like raw materials, labour and shipping costs. If you roast and sell coffee like Coffee Roaster Enterprises, for example, this might include the cost of raw coffee beans, wages, and packaging.

Indirect expenses like utilities, bank fees and rent are not included in COGS—we put those in a separate category.

Gross profit

This is what you get when you subtract total COGS from revenue. Gross profit tells you how profitable your business is after taking into account direct costs, but before taking into account overhead costs. It’s a rough measure of how efficient your business is.

General expenses

Also sometimes referred to as “operating expenses,” these include rent, bank & ATM fee expenses, equipment expenses, marketing & advertising expenses, merchant fees, and any other expenses you need to make to keep your business going.

These expenses are listed individually here, but some income statements will bundle these and other similar expenses together into one broad category called “Selling, General & Administrative Expenses” (SG&A).

Operating earnings

This is how profitable your business is after taking into account all internal costs, which you have more control over, but before taking into account external costs like loan interest payments and taxes, which you have less control over.

Accountants will sometimes call this Operating Profit or Operating Income.

Interest expense

If your business owes someone money, it probably has to make monthly interest payments. Your interest expenses are the total interest payments your business made to its creditors for the period covered by the income statement.

Earnings before income tax

This is your business’s profitability before it pays its taxes.

Income tax expense

This is how much you paid Uncle Sam.

Net profit

Ever wonder where we get the expression “bottom line” from? This is it! This is the final, total profit for your business.

Income statement template

You don’t need fancy accounting software or an accounting degree to create an income statement. Our expert bookkeepers here at Bench have built an Income Statement template in Excel that you can use to turn your business’ financial information into an Income Statement.

What is a single-step income statement?

The income statement we showed you above is technically called a “multi-step” income statement, because you have to perform multiple calculations in order to arrive at your final net income. (In this case, we calculated gross profit, then subtracted general expenses, then subtracted interest, and income tax expenses.)

A single-step income statement is a little more straightforward. It adds up your total revenue, then subtracts your total expenses to get your net income. Simple.

Here’s an example single-step income statement we created for another hypothetical company, Dead Simple Coffee Inc.:

Dead Simple Coffee Inc.

Income Statement

For Year Ended Dec. 31, 2018

Category Amount
Revenues and Gains
Sales revenue $57,833.72
Capital gains $4,477.34
Total revenues and gains $62,311.06
Expenses and Losses
Cost of goods sold (COGS) $22,276.72
Rent $8,299.22
Bank & ATM Fees $21.83
Equipment expenses $987.82
Marketing and Advertising expenses $1,387.22
Interest expense $4,538.34
Income tax expense $13,900.22
Total expenses and losses $51,411.37
Net income $10,899.69

The single-step format is useful for getting a snapshot of your company’s profitability, and not much else, which is why it’s not as common as the multi-step income statement. But if you’re looking for a super simple method of calculating your business’ profitability, single-step is the way to go.

What is a common size income statement?

Common size income statements include an additional column of data which summarizes each line item as a percentage of your total revenue.

For example, here’s the income statement for Coffee Roaster Enterprises Inc. we mentioned earlier, done up as a common size income statement:

Coffee Roaster Enterprises Inc.

Income Statement

For Year Ended Dec. 31, 2018

Category Amount Percent
Sales Revenue $57,050.68 100.00%
Cost of Goods Sold (COGS) $24,984.79 43.79%
Gross Profit $32,101.99 56.27%
General Expenses $11,049.55 19.37%
*Rent $9,000.00 15.77%
*Bank & ATM Fee Expenses $9.43 0.01%
*Equipment Expenses $742.40 1.30%
*Marketing Expenses $503.53 0.88%
*Merchant Fees Expenses $794.19 1.39%
Operating Earnings $21,052.44 36.90%
Interest Expense $5,000.00 8.76%
Earnings Before Income Tax $16,052.44 28.14%
Income Tax Expense $10,000.00 17.53%
Net Profit $6,052.44 10.60%

Common size income statements make it easier to compare trends and changes in your business.

For example: if your Operating Earnings change from $21,052.44 to $23,443.33, that might not tell you much by itself, because other numbers might have changed as well. But if your Operating Earnings increase from 36.90% to 44.23%, that’s a concrete, significant change in your business.

Income statement vs. balance sheet: what’s the difference?

A balance sheet shows you how much you have (assets), how much you owe (liabilities), and how much is left over (equity). It’s a snapshot of your whole business as it stands at a specific point in time.

An income statement describes how profitable your business is. It shows you how much money flowed into and out of your business over a certain period of time.

Further reading: Income Statements vs. Balance Sheets

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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