The results of operations of a company is summarized in the income statement. The income statement presents all revenues and all expenses. Revenues minus expenses is equal to net income. The net income is the bottom line measure of a company's financial performance for a particular period.
Here are examples of the income statement.
The amounts are assumed and contents are simplified for illustration purposes.
| XYL Graphic Designs, Inc. | ||||
| Income Statement | ||||
| For the Year Ended December 31, 2021 | ||||
| Service Revenue | $ 270,000 | |||
| Less: Expenses | ||||
| Salaries Expense | $ 80,000 | |||
| Rent Expense | 30,000 | |||
| Advertising Expense | 16,000 | |||
| Utilities Expense | 10,000 | |||
| Depreciation Expense | 8,000 | |||
| Supplies Expense | 2,000 | 146,000 | ||
| Income before Tax | $ 124,000 | |||
| Less: Income Tax Expense | 48,360 | |||
| Net Income | $ 75,640 | |||
The income statement starts with a heading made up of three lines. The heading contains: (1) the name of the company, (2) the title of the financial statement, and (3) the period covered by the report.
The income statement of a service type business is quite simple. Revenue accounts are presented first followed by all of the company's expenses. The resulting amount is then subjected to income tax. Note: Income tax treatment depends upon the tax laws of the state/country.
Some income statements of service businesses present "Cost of Service" in a separate line after revenues. It shows the expenses that are directly associated with the services rendered.
| GHI Market Associates Corporation | |||||
| Income Statement | |||||
| For the Year Ended December 31, 2021 | |||||
| Sales | $ 960,000 | ||||
| Less: Cost of Sales | 680,000 | ||||
| Gross Profit | $ 280,000 | ||||
| Less: Operating Expenses | |||||
| Selling Expenses | |||||
| Sales Salaries Expense | $ 40,000 | ||||
| Advertising Expense | 15,000 | ||||
| Utilities Expense - Store | 6,000 | ||||
| Depreciation Expense - Store | 5,000 | ||||
| Store Supplies Expense | 4,000 | $ 70,000 | |||
| Administrative Expenses | |||||
| Office Salaries Expense | $ 22,500 | ||||
| Utilities Expense - Office | 6,500 | ||||
| Depreciation Expense - Office | 5,000 | ||||
| Permits and Licences | 4,000 | ||||
| Office Supplies Expense | 2,500 | ||||
| Bad Debts Expense | 1,500 | 42,000 | |||
| Total Operating Expenses | $ 112,000 | ||||
| Operating Income | $ 168,000 | ||||
| Other Revenues and Expenses | |||||
| Gain on Sale of Equipment | $ 20,000 | ||||
| Interest Expense | (12,000) | 8,000 | |||
| Income before Tax | $ 176,000 | ||||
| Less: Income Tax Expense | 68,640 | ||||
| Net Income | $ 107,360 | ||||
Example 2 shows how an income statement of merchandising and manufacturing businesses would look like. In the above example, a separate line for "Cost of Sales" is presented. It shows the cost of the products sold, hence also known as "Cost of Goods Sold".
Selling expenses were shown separately from administrative expenses. Selling expenses pertain to expenses directly related to the selling and marketing functions. Administrative expense pertain to those associated with the activities of the administration such as billing and collection, hiring, board meetings, etc.
The difference between all revenues and all expenses is then subjected to income tax to arrive at the company's net income.
Though they may be presented differently, all income statements have the same goal and purpose. An income statement presents a company's revenues and expenses over a particular period of time, to provide the users information about the operating performance of the company. When studying company figures, it is good to compare income statements over different periods or with income statements of other similar companies.
An income statement provides information regarding the "results of operations" of a business, or otherwise known as "financial performance".
In the above, you learned more about the income statement through examples for a service business and a merchandising/manufacturing business.
