What is an income statement? Why is it important?
Last month, I talked about balance sheets including what they do for a business and which kinds of businesses should use one. This month, we’re talking about income statements.
Last time, we talked about a Balance Sheet. A balance sheet shows your overall financial picture as of one point in time, for example, November 30, 2018. An income statement shows how much your business is making over a period of time, such as the entire month of November.
What does an income statement tell me?
An income statement only has two sections: revenue and expenses.
Simply put, revenue is the total amount that you took in for sales. Your expenses are any amount of money you spent in an effort to make sales. This could include raw materials you purchased, marketing costs, utilities, and other expenses operating your office (just to name a few).
According to the IRS, expenses are only deductible if they are deemed “ordinary and necessary.” What does that mean, exactly? Ordinary is an expense that most people in that industry or type of business would have such as flour for a baker. Necessary is an expense that is needed in order to conduct business such as paying rent for your office or utilities.
To deduct an expense, it must be both ordinary and necessary. Sorry, that means that for most businesses, purchasing a private jet is not a tax deduction! Some companies do need a private jet, especially a larger, international corporation. For a business like that, it makes sense. But for entrepreneurs and small business owners, it’s not necessary.
You arrive at your income figure when you take your revenue and subtract your expenses. If your revenue is greater than your expenses, you have net income. If your expenses outweigh your revenue, then you have a net loss. This is why your income statement is also often referred to as your profit and loss statement.
Why do I need an income statement?
We’re going to discuss this in a bit more detail in my next blog, but essentially, an income statement is another vital document that helps you make decisions in your business. It tells you information such as:
How much money you’re bringing in during that time frame,
What your biggest and smallest expenses are, and
Your best and worst selling products and services.
Let me help
Good bookkeeping methods, including maintaining accurate financial documents such as an income statement, are vital to your business’ success. Each of us who own a business do so to earn a living, but also to do work we love. Let’s talk about how I can do what I love, which is bookkeeping, so that you can continue to do what you love.