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How To Prepare An Income Statement: A Simple 10-Step Business Guide


By understanding the income and expense components of the statement, an investor can appreciate what makes a company profitable. Revenue realized through secondary, noncore business activities is often referred to as nonoperating, recurring revenue. An Income Statement can be prepared in a Single-Step format that calculates the Net Income by subtracting expenses and losses from revenues and gains.

  • Trial balance provides the closing balances of all the ledger accounts on a specific date and is the first report needed to prepare all of a business’s financial statements.
  • Alternatively, if the analyst has a thesis on changes in price and volume by segment, a more comprehensive forecast approach is required.
  • The purpose of an income statement is to show the profits and losses a company made over a specified period of time.
  • Income statements show how much profit a business generated during a specific reporting period and the amount of expenses incurred while earning revenue.

The and expense accounts can also be subdivided to calculate gross profit and the income or loss from operations. These two calculations are best shown on a multi-step income statement. Gross profit is calculated by subtracting cost of goods sold from net sales. Operating income is calculated by subtracting operating expenses from the gross profit.

Interest expense

Therefore, prepare the income statement for the six months ending on June 30, 2018. The operating expenses section contains a number of line items that may instead be classified as selling, general and administrative expenses. It includes all expenses required to run the business that were not already included in the cost of goods sold. These expenses cover the areas of sales, marketing, IT, risk management, human resources, accounting, and finance. The line items in this section may be stated by function, such as rent expense, utilities expense, and compensation expense. A quarterly income statement shows the profits or losses generated by your business over a 3-month period. It can also be referred to as a profit and loss report, and is a crucial financial statement that shows the business’s income and expenditures, detailing your net income or net profits.

The following are the steps to prepare an income statement for your business. All non-owner changes in equity (i.e., comprehensive income) shall be presented either in the statement of comprehensive income or in a separate income statement and a statement of comprehensive income.

Some FRS 102 requirements relevant to the income statement

Before we look at what’s in our income statement template, we need to give you a bit of context about how we’ve prepared it. In double-entry bookkeeping, the income statement and balance sheet are closely related. Double-entry bookkeeping involves making two separate entries for every business transaction recorded. One of these entries appears on the income statement and the other appears on the balance sheet. FreshBooks provides a range of income statement and balance sheet examples to suit a variety of businesses, no matter if you have just started out or if you are looking for a different solution. Cash flow statements are financial statements that detail the amount of money a company has generated and spent. Suppose XYZ is a US-based company, and a multiple-step income statement is followed here.


Ultimately, horizontal analysis is used to identify trends over time—comparisons from Q1 to Q2, for example—instead of revealing how individual line items relate to others. It is also a regular U.S. corporation which means the income statement will include income tax expense. Operating revenue is realized through a business’ primary activity, such as selling its products. Non-operating revenue comes from ancillary sources such as interest income from capital held in a bank or income from rental of business property. Below is a video explanation of how the income statement works, the various items that make it up, and why it matters so much to investors and company management teams. After preparing the skeleton of an income statement as such, it can then be integrated into a proper financial model to forecast future performance. Depreciation and amortization are non-cash expenses that are created by accountants to spread out the cost of capital assets such as Property, Plant, and Equipment (PP&E).

How do you explain a profit and loss statement?

The multi-step structure includes a more detailed breakdown of a company’s expenses. It also calculates different profit margins, including gross profit and operating profit. See here for more information on the single-step and multi-step income statements. These costs include wages, depreciation, and interest expense among others. Cost of goods sold expenses are reported in the gross profit reporting section while the operating expenses are reported in the operations section. Other expenses are reported further down the statement in the other gains and losses section.

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