Today, we shall learn about the balance sheet or income statement and their difference. The first and foremost thing is to define these two terms. The income statement is a record of revenue, expenses, and the profit or loss. There are two types of income statements i.e. Single step and multiple-step income statement. The later involves various subtractions in the calculations. So, what we can say is that the financial performance of a company in a particular time such as a year is called income statement. [Excel Template Download Link is in The END of this article]
Income statement definition
Let’s have a look at how the biggest dictionaries define it. All of them at one place.
Definition of Income statement from Oxford dictionary. They call it balance sheet. Their terms are complex.
Income statement from Dictionary
Accounting Definition of Income records.
Purpose of Income statement
So, we knew that records of revenue, expenses, and profit or loss are presented in the form of paper known as Income statement. Now, this has the following benefits.
- Clearer Tabulated Data
- Ready to analyze
- Great Tool for R&D
- Important for Security Purposes.
- It is also known as the p&l statement as it shows the profits and losses.
Balance sheet vs. income statement
We know that a simple balance sheet covers one moment in time. Whereas the income statement provides performance information about a time period which starts from the sales and ends on the profits. It is also known as the declaration of revenue and expense. There are mainly three financial reports, first is Income statement, the second is balance sheet and the third is the statement of cash flow. Where does the money come from and where is it going? So, for security reasons, you shall have to provide income statement to the Securities and Exchange Commission for clearance while the other two are critical for computing company’s financial performance.
Income statement template & Proforma Income Statement:
A simple statement includes the following things.
- Cost of Goods sold
Let’s see this template.
What is revenue?
Revenue includes income earned from the principal activities of an entity. So for example, in the case of a manufacturer of electric fans, the main revenue will come from the sales from electric fans. The other income includes income from other sources such as credit from the bank. The concept of primary revenue and secondary revenue is related here to the main income and other income.
Income statement example:
In this example, we shall cover concepts of Gross Profit and Net Profit.
In the above example, gross profit refers to the funds of revenue when the cost of sold items is subtracted.
Net profit is profit after the income tax is excluded. You can see that Profit before tax is greater than the net profit. To understand it better, let’s make a formula for it.
Net Profit= Profit – Income Tax
Where, Profit = Gross Profit – Expenses.
Administrative costs usually differ in values due to the expenses relating to the direct and indirect management and other support functions within an organization that is not directly involved in the production. These costs for a typical company may include the following costs.
|1) Advertising Costs|
|3) Bad Debts|
|4) Bank Charges|
|5) Charitable Contributions|
|7) Contract Labor|
|9) Dues and Subscriptions|
This is a list of common expenses. It is vital for calculating the Net Profit.
Income statement format
So, we have already discussed the template and an example. We are now able to formulate the basic blocks for the statement. To begin with, we have the following blocks.
- Total Revenue Generated.
- Gross Profit
- Net Profit.
Let us look at this another example to understand the Income statement layout.
So, we have the revenue, expenses, and the net income. That is our goal, and that is our Income statement sample.
Income statement formula
Let’s know about the Income statement equation and know how to calculate it. It allows you to compare revenues to expenses, among other items. The following formula helps you to understand the profit and loss of a company. You can tell about the company whether it is benefiting or not. The following calculations are all we need. Make sure you know about the key terms used in below formulas. If you don’t remember, scroll up and read them again. Experts and analysts use the income statement for data to calculate basic financial ratios such as return on equity (ROE), return on assets (ROA), gross profit, operating profit, earnings before interest and taxes (EBIT), and earnings before interest taxes and amortization (EBITDA).
Not that, EBIT is Earning before Interests and Taxation.
Dividends on Income statement
Do you know what a dividend is in the income statement? A ‘cash dividend’ is a distribution of some of the portion of a corporation’s total earnings to its stockholders.
Depreciation on Income statement
Before going into further details, let us know what depreciation is. Depreciation is the allocation of a plant or factory asset’s cost to the expense over the particular accounting periods that the asset is likely to be used or get expired after the period. Let’s take an example if a certain business purchase a big delivery vehicle, i.e., the truck with a purchase cost of $100K and it is expected to be used for five years only; the business might have depreciation expense of $20K in each of the five years duration. (The amount of money may vary depending on the method used and assumptions made.)
Income statement ratios
It’s very important to know about the calculations and ratios involved. Here we have the complete list of ratios used in income records.
- Gross Margin Ratio Formula: gross profit ÷ Revenue
- Research &Development to Sales Ratio and formula: R&D expense ÷ revenue
- Operating Margin Formula: Total operating income ÷ Revenue (aka operating profit margin)
- Net Profit Margin Ratio: Net Income (excluding taxes) ÷ Revenue
- Interest Coverage Formula: EBIT ÷ interest expense
- Return on Equity (ROE) Ratio Calculations: Net Profit ÷ average shareholder equity for the period
- Asset Turnover Ratio Formula: Revenue ÷ average assets for period
- Total Return on Assets Formula: Net Profit margin * asset turnover or net income ÷ total average assets for the period
Income statement dividends
So, what are cash dividends? A cash dividend is a distribution of a part of a company’s total earnings to its shareowners.
Cash dividends on the common stock are usually not written on the income statement as they are not the expenses. Dividends on preferred stock are not expenses but will be deducted from net income just to report the total earnings available for common stock on the income statement.
Income statement generator
Traditionally, profit and loss records are kept in excel sheet. If you have the template, you can calculate the income statement quickly.
Just make sure to know the Total Revenue, Gross Profit, Taxes, Expenses. Scroll up in case you need to see the formulas for calculations. The single-step statement format uses just a single subtotal for the revenue line items and also a single subtotal for all the expense line items, with a net gain or loss shown at the bottom of the report. This is the most used format by small businesses that have relatively small calculations. However, large corporations may need a multi-step statement which is a bit complex as well as difficult to handle. So, depending on the size of calculations, you may decide to use the former or the later version.
Types of Income statements
There are two types of reports. The first is single step while the other is a multi-step statement. Both of them are important. The difference is the size of the calculations. The former one is a bit complicated and requires better understanding and skills.
Income statement Excel sheet download:
So finally, we are here with template ready for Download Excel Sheet for Statements. The file contain the following calculations!
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The excel sheet is taken from Microsoft Corporations!