Businesses that are publicly traded must generate income statements on quarterly and annual basis to file with the Securities and Exchange Commission. Businesses also generate income statements on a periodic basis to identify business trends and evaluate financial results.
The first section of the income statement calculates gross profit, or the total amount of money made, from sales revenue and cost of goods sold. The second section calculates your total operational expenses. The third section calculates gains and losses unrelated to your operational costs. The fourth section calculates net income, or the money you’ve made in profit after subtracting your expenses from your revenue.
For example, say that you sold 10,000 units of inventory for $5 USD a piece. You would record sales revenue of $50,000 USD, even if your customers haven’t all paid you yet.
For example, if you sold 10,000 units of inventory during the period and paid an average of $2 USD for each unit, you would record $20,000 USD for the cost of goods sold. If you’re a reseller, cost of goods sold is typically the price that you paid to purchase the inventory.
For example, if sales revenue is $50,000 and the cost of goods sold is $20,000, you would record gross profit of $30,000 on the income statement. Use a green pen or change the font color to show that the number listed is a profit.
Common operating expenses include salary and wages for those employees not directly involved in the product of goods, rent, insurance, office supplies, professional fees, utilities, transportation expense, marketing, depreciation, and property taxes. Direct labor has already been deducted from the Cost of Goods. If the business has a large variety of expenses, you can group similar line items into one category to save space. For example, you can create an “Employee compensation” line item that includes salaries, health insurance premiums, retirement benefits, payroll taxes, worker’s compensation, and payroll processing fees.
Use a red pen or change the font color to red to signify that the expenses should be subtracted at the end.
Common non-operational gains include interest revenues and gains from the sale of securities. These items add to the income of the enterprise while expenses reduce income.
Write your gains in green so you know that they’re a profit.
Common non-operational losses include interest expense paid to lenders, losses from the sale of investments, and losses from litigation.
List the total losses in red to color-code your spreadsheet. That way, you know to combine them with your other operational expenses.
Your net income could be positive or negative depending on how much you spent and earned during the period of time.
