Income Statement Definition, Meaning | Format | Importance

income statement definition

Income Statement Definition

Income Statement Definition – “A report showing a company’s revenue, expenses, and profit over a period of time, usually a month, a quarter, or a year. The income statement is also known as a profit and loss statement, a statement of operations, and a statement of earnings”.

In general term, it is a financial statement that portrays the enterprise’s financial performance over a period of time. It matches the company’s expenses with the revenues. If revenues are greater than expenses, then net profit is obtained. Similarly, if expenses are greater than revenues, then company has to bear losses.

This  also known as the Profit and Loss statement. As in the end, it concludes whether firm has profit or loss. One of the important document for preparing the Balance Sheet. It is also very important from the legal point of view as public companies have to submit it with Securities and Exchange Board of India. It is also mandatory for the companies to reflect it in the annual report.

This financial statement consist of both operating and non – operating gains and expenses. For example – ABC is a company in the garment manufacturing industry. Suppose it sells one of its weaving machine. The returns will be treated as gains. This is an example of non – operating gains. As the real business of enterprise is different.

Income Statement Format

The format of Income statement will more clearly make you understand the income statement definition.

Income Statement for the Year ending 31st March 2017

Revenues

Gross Sales
Less: Sales Returns

Net Sales……………………………………………………………………………………………………………………………

Cost of Goods Sold

Inventory in the beginning of the year
Add: Purchase made during the year
Less: Inventory at the end of the year

Cost of Goods Sold……………………………………………………………………………………………………………

Gross Profit/ Loss…………………………………………………………………………………………………………….

Expenses

Advertising
Bad Debts
Commissions
Depreciation
Employee benefits
Furniture and equipment
Insurance
Maintenance and repairs
salary
rent
salaries and wages
travelling allowance

Total operating expenses……………………………………………………………………………………………………………..

Operating Income/ Loss
Non – operating revenues, expenses, gains, losses
Less: Interest expense
Income before taxes
Less: Income tax expense

Net Income/ Loss…………………………………………………………………………………………

Related Financial Terms of Income Statement

Importance of Income Statement – Why Income Statement is Used?

Income Statement definition is incomplete without its uses. Income statement plays a vital role for any enterprise.

  • It is helpful in calculating various ratios including return on equity, return on assets, gross profit, operating profit, earning before interest and taxes and earning before interest taxes and amortization.
  • Provides a clear picture of all the expenses incurred and revenues earned.
  • Analysts use Income statement for comparing the yearly or quarterly performance of the company.
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