An Income Statement (also known as a Profit and Loss Statement or P&L) is produced by a bookkeeper and forms part of a business’s Management Accounts . It depicts the financial performance of your business over a specific period which is normally either a month, a financial quarter or a financial year, and ultimately shows how much money your business made, or lost, in that period.
The Income Statement separates income for the business from expenditure that the business has incurred. It is important to realise that an Income Statement is different from a cash flow forecast, as it does not predict when money will be coming into or leaving the business.
The format of the income statement will vary according to the business’s activities, but the basis of an Income Statement is as follows:
Your business’s Income
its Cost of Sales (or ‘Cost of Goods Sold’: the costs directly attributable to the production of the goods sold by your business – materials and labour are good examples)
gives your business’s
which, after the deduction of
Expenses (or “Overheads“. e.g. advertising, telephone, bookkeeping, entertainment, stationery, electricity, water)
leaves you with your
Net Profit / Loss (how much money the business made, or lost)
Your Income Statement gives an accurate representation of your business, so by studying your business’s Income Statements over a period of time, it is possible to spot trends and to make predictions. In turn, this gives you the opportunity to assess how much risk may be associated with a forthcoming investment by your business.
Potential investors will also use your Income Statements – to assess the risk associated with their potential investment – and existing investors can use them in order to assess what kind of return they are getting on their investment.
To summarise, your Income Statement is one of several financial documents that are important to your business. Although it does not predict the flow of cash into and out of your business, it does represent how much money your business made, or lost, over a specified period of time.