Income statements are an important aspect of any business and one of the three parts of a financial statement that include a balance sheet and a cash-flow statement. This means that if you ever want to experience what real success feels like in the business world, you’d need to be able to read one and learn how to prepare it. This post highlights every aspect of the income statement process and steps to follow when you need to prepare one. We will also go over an example of the income statement document and the format to follow when you want to prepare one in Excel. <\/p>\n\n\n\n
An income statement is an important document for every business or financial organization. The income statement typically contains the revenues, and expenses that result in the profit or loss of a business. An income statement is one of the three components that make up a complete set of financial statements. The other two reports that make up a financial statement of a business include the balance sheet and statement of cash flows.<\/p>\n\n\n\n
However, in order to properly prepare a financial statement, you must know how to properly prepare an income statement. This is not a difficult task only if you know the steps. <\/p>\n\n\n\n
The following steps will show you how to prepare an income statement.<\/p>\n\n\n\n
You can go to the accounting software and print the “trial balance” standard report. This simply means a summary report that contains the ending balance of every account in the general ledger.<\/p>\n\n\n\n
Aggregate all of the items on the revenue line, which is on the trial balance, and then insert the result into the revenue line item in the income statement.<\/p>\n\n\n\n
Total all the cost of goods that are on the sold line items on the trial balance. And, insert the result into the cost of goods on the sold line item in the income statement. The cost of goods sold now typically includes the costs of direct labor, direct materials, and factory overhead. This is in line position directly below the revenue line item.<\/p>\n\n\n\n
This step entails that you subtract the cost of goods sold from the revenue figure, in order to arrive at the gross margin. The gross is typically the amount earned on the sale of products and services.<\/p>\n\n\n\n
In this step, you need to total the expense items on the line below the cost of goods sold in the trial balance. Furthermore, insert the result into the selling and administrative expenses line item in the income statement. This line is directly below the gross margin line.<\/p>\n\n\n\n
In this step, subtract the selling and administrative expenses from the gross margin to arrive at pre-tax income. Then, insert this calculation at the bottom of the income statement.<\/p>\n\n\n\n
In order to calculate the income tax, you have to multiply the applicable tax rate by the pre-tax income number. which enables you to typically arrive at an income tax expense. Then, enter the amount below the pre-tax income number, and record it in the accounting records with a journal entry.<\/p>\n\n\n\n
In this step, subtract the income tax from the pre-tax income figure, and then enter the amount on the last and final line of the income statement as the net income figure. Also, include net income as a percentage of revenue.<\/p>\n\n\n\n
Your income statement needs to contain a header that you typically identify as an income statement. The header includes the following: the name of the business and the date range that the income statement covers. Which is either for a month, quarter, or year.<\/p>\n\n\n\n
It\u2019s important to note that all accounting software has a standard income statement report that automatically presents the information required as in the above steps. However, these steps only contain actions in which you are required to manually shift income statement information from the trial balance to a manually prepared income statement. <\/p>\n\n\n\n
As I explained above, an income statement is a financial report that explains a company\u2019s income and expenses over a reporting period. However, an example of how to prepare an income statement may vary by business type. You can also refer to the income and expenses as a profit and loss (P & L)<\/a>. Income statements show a company\u2019s financial performance over a reporting period. This is because the income statement contains and shows revenues and expenses, providing a look into which business activities brought in revenue and which cost the organization money. <\/p>\n\n\n\n Importantly, when it comes to financial statements, each statement communicates specific information and is very essential in their different contexts in order to understand a company\u2019s financial health. However, the income statement is one of the most important financial statements. This is because it details a company\u2019s income and expenses over a specific period as well as communicates a wide range of rich information to those reading it. From the information ranging from key executives and stakeholders to investors and employees, being able to read an income statement is important. Knowing how to prepare or generate one is even more critical. <\/p>\n\n\n\n We previously discussed the steps you need to follow in order to prepare an income statement. Now we typically want to follow those steps in order to show you an example of you should prepare an income statement. Meanwhile, before we dive into an example of how to prepare an income statement. I want you to be aware of the meaning of some terms you will see and use in this statement. This term includes;<\/p>\n\n\n\n Follow the example below to understand how you should prepare an income statement for your business. Most people also understand ideas when they are in picture form. This is because they are fun and easy to understand. <\/p>\n\n\n\n This is an example of an income statement for Maxwell Ltd. <\/p>\n\n\n\nIncome Statement Terms<\/h3>\n\n\n\n
Income statement for Maxwell Limited for the period ending December 31st, 2021<\/h4>\n\n\n\n