Income statement is a statement which provides the income a company has and its expenditure. This also shows if a company is making profit or having loss for that specific given time. It basically summarizes the transactions that produced revenue for said business as a result of selling services/products.
What does it provide?
This statement presents the company’s assets, owners equity (which is the owners rights and ownership of the assets in the company. It is what is left over after liabilities are deducted from the assets), and liabilities during a particular point in time. Income statement shows the revenues earned and expenses. Basically the income statement summarizes all the transactions that produced revenue for the business.
What are revenues? Revenue is the result after the company’s sales of product/services. The more revenue = the higher the increase in owners equity. This is completed when the selling company has met the requirements under its initial agreement with the buyer and in result, has received a continuously committed payment from the buyer itself. The flow of revenues depends on the seller’s finalization of the sales agreement and is not dependent on the flow of cash.
What are costs and expenses? This is the money a company provides for the production of their goods and services. An example of this would be ordering merchandise (the cost) to sell later (the goods/services). When the merchandise is sold to a customer – it is going to be sold at a sales price.
The difference between the cost of merchandise sold and sales price is matched. This is called the gross margin. The income statement can be prepared in one of two methods: ‘The Single Step‘ where the income statement totals revenues and then subtracts expenses to come to a result, and the ‘The Multi-Step‘ income statement, which takes a few more steps to find the conclusion. It begins with the gross profit, then calculates the operating expenses. Whatever left from the deducted gross profit, provides income from operations.