An income statement, also known as a Profit and Loss Account, is a financial statement that shows how a company earns its income and incurs its expenses over a specific period of time.
1. Sales Revenue
Sales revenue represents the total amount of money a business makes from selling its goods or services. This is the top line on the income statement and often referred to as gross sales. It does not account for any deductions such as returns or discounts.
2. Cost of Sales (or Cost of Goods Sold, COGS)
Cost of Sales represents the cost of producing the goods or services that a company has sold during a particular period. This includes the cost of materials and direct labor costs to produce the goods or services.
3. Gross Profit
Gross Profit is calculated by subtracting the Cost of Sales from the Sales Revenue. It represents the profit a company makes after deducting the costs associated with making and selling its products.
4. Expenses
Expenses are the costs not directly tied to the production of goods or services. This could include rent, utilities, marketing and advertising, office supplies, salaries for employees not directly involved in production, and depreciation.
5. Net Profit
Net Profit, also referred to as the ‘bottom line’, is calculated by subtracting total expenses from the gross profit. It shows what the company has earned or lost after all costs and expenses are considered.
Now you can construct a simple income statement. Here’s what it would look like with the numbers from our example:
Income Statement for Bookstore 2022-2024
| 2022 | 2023 | 2024 | |
|---|---|---|---|
| Sales Revenue | £20,000 | £30,000 | £35,000 |
| Cost of Sales | £10,000 | £14,000 | ???? |
| Gross Profit | £10,000 | ???? | £18,000 |
| Expenses | £4,000 | £6,000 | ???? |
| Net Profit | £6,000 | ???? | £10,000 |
| 2022 | 2023 | 2024 | |
|---|---|---|---|
| Sales Revenue | £20,000 | £30,000 | £35,000 |
| Cost of Sales | £10,000 | £14,000 | £17,000 |
| Gross Profit | £10,000 | £16,000 | £18,000 |
| Expenses | £4,000 | £6,000 | £8,000 |
| Net Profit | £6,000 | £10,000 | £10,000 |
An income statement provides a view of a business’s profitability. It is used by investors, creditors, and other stakeholders to understand the financial health of a company.