An income statement is one of the main financial statements that businesses use and it gives a detailed summary of a company’s profitability over a certain period. This statement is important to the stakeholders such as the investors, creditors, and the management to decipher the financial performance of the business. The items present on an income statement are intended to reflect a company’s revenues, expenses, and ultimately, its net income or loss.
The top part of the income statement begins with revenue accounts that show the total revenue received from the main activities of the business, like sales of goods or services. This also covers both gross sales as well as net sales, the latter of which takes into account returns or discounts. Other revenue, which includes interest gained from investments or income from secondary activities, may be shown as a separate item.
After the revenue, the income statement presents various expense accounts that are costs that have been incurred in the generation of the reported revenue. These costs are generally classified into cost of goods sold (COGS), operating expenses, and non-operating expenses. COGS consists of direct costs associated with the production of the goods sold by the company. Selling, General, and Administrative (SG&A) expenses are part of operating expenses, which encompass the costs of the regular operations of the business. The other type of expenses, non-operating expenses, includes expenses that are not related to the main business operation, for example, interest expenses on loans.
Net income or net loss for the period is derived at the end of the income statement after all revenues and expenses have been accounted. Net income is computed as the difference between total revenues and total expenses. A net loss occurs when expenses are more than revenues. This bottom line acts as a simple measure of the company’s profitability for the period under consideration.
Other income statements may also have comprehensive expense or revenue break downs, taxes paid, and the earnings before interest and taxes (EBIT). Furthermore, companies may present earnings per share (EPS) in the income statement, which represents the proportion of a company’s profit distributed to each outstanding share of common stock, thus serving as a direct measure of the company’s profitability on a per-share basis.
In general, the accounts on an income statement provide a systemic picture of the financial operations that affect a company’s profitability, supplying important information about its operational efficiency, cost control, and revenue generating capacities. Learn more about which accounts are found on an income statement.
Which accounts are not found on an income statement?
An income statement, an important financial report in accounting, is concerned with a company’s revenues, expenses and profitability during a particular period. Yet, some accounts are conspicuously absent from an income statement as they relate to other areas of financial wellbeing and operations of a company. These accounts are different from what is a pro-forma financial statement and are often located in other financial statements, such as the balance sheet or the statement of cash flows, each fulfilling a specific role in financial reporting.
The most important thing is that asset accounts which represent the list of a company’s resources, such as cash, accounts receivable, inventory, and fixed assets, are not included in the income statement. They offer a snapshot of the firm’s holdings and investments at a given point in time and are mainly found on the balance sheet. The balance sheet is a picture of the company’s financial position, what it owns and what it owes.
Also, liability accounts, which represent the company’s obligations to other, such as accounts payable, short-term loans, and long-term debt, are left out of the income statement. These accounts reflect the company’s financial commitments and are also shown on the balance sheet, which completes the picture of the company’s financial state through its assets, liabilities, and equity.
Equity accounts are also a category not found on the income statement which is an indicator of the company’s owners or shareholders stake. The accounts comprise of retained earnings, common stock, and additional paid-in capital, and they represent the residual claim on the company’s assets after the liabilities are deducted. Equity accounts changes are shown in the statement of changes in equity and the balance sheet, not in the income statement.
Finally, the statement of cash flows, separate from the income statement, contains accounts dealing with cash inflows and outflows from operating, investing, and financing activities. This statement gives an in-depth view on how a company produces and uses cash, thus, illuminating its liquidity and financial flexibility, issues that are not directly covered by the income statement.
Comprehending the particular purpose of the income statement and identifying the accounts that are not covered assists in understanding the bigger picture of financial reporting and the unique role played by each financial statement in portraying the financial performance and position of the company.