A business income statement is one of the most important financial documents a business can produce. It shows how much revenue a company has earned over time, the expenses it incurred, and the resulting profits or losses.
This information is essential for making sound business decisions. So, the following will explain how to prepare and interpret a business income statement.
How to prepare an income statement
There are various steps you can take to prepare an income statement. Some of the most important include the following.
Use a template
Templates can be found online or in accounting software. An income statement template will help you to ensure that you include all the necessary information and format the statement correctly.
If you’re using accounting software, the program will typically generate an income statement for you automatically. However, it’s still a good idea to understand how to prepare one manually so that you can verify the accuracy of the software’s calculations.
Choose a time period
The income statement covers a specific period, such as a month, quarter, or year. Most businesses prepare income statements monthly, although some do so quarterly.
Once you’ve chosen a period, you can’t change it. So if you discover that you made a mistake later, you’ll have to prepare a new income statement for the correct period.
Gather your financial information
To prepare an income statement, you’ll need financial information from your accounting records. This information includes your revenue, expenses, and any gains or losses.
If you don’t have this information, you can get it from your company’s financial statements. These are typically prepared by an accountant or bookkeeper and contain all the information you need to schedule an income statement.
Interpret your business income statement
Once you’ve prepared your business income statement, it’s time to interpret the results. Here are a couple of things to look for regarding your business plan.
You’ll want to look at your company’s revenue first, which is the total amount of money your business has earned over the chosen period.
You can move on to expenses if you’re happy with your revenue. But if you’re not, you’ll need to look closely at your business to see what’s causing the problem.
Next, take a look at your expenses. These are the costs that your business has incurred over the chosen period, such as paying remote employees.
You’ll want to ensure that your expenses align with your revenue. You may need to cut back on some costs if they’re not.
Profit or loss
After subtracting your expenses from your revenue, you’ll either have a profit or a loss. If you have a profit, your revenue is greater than your expenses, and you make money.
If you have a loss, it means that your expenses were greater than your revenue, and you lost money. Either way, it’s essential to understand why you had a profit or loss so that you can take steps to improve your financial situation.
Now that you know how to prepare and interpret a business income statement, you can use this information to make better financial decisions for your company. Just remember to use accurate information and take the time to understand the results.