What is Income Statement?

The income statement answers a simple question: did the business make money during the period? It lists revenue, subtracts costs and expenses and arrives at net income or loss.

Typical layout

1. Revenue: sales of goods and services, less returns and discounts
2. Cost of goods sold: direct costs of what was sold; see cost of goods sold
3. Gross profit: revenue minus cost of goods sold; see gross profit
4. Operating expenses: rent, wages, marketing, software, insurance
5. Operating income: gross profit minus operating expenses
6. Other income and expense: interest, gains or losses on asset sales
7. Net income: the bottom line

Reading it well

• Compare months and the same month last year rather than looking at one period alone
• Watch gross margin percentage; small changes often signal pricing or cost problems
• Look at expenses as a percentage of revenue
• Remember that profit is not cash: loan principal, asset purchases and owner draws do not appear on the income statement; see cash flow basics

Cash vs accrual basis

On a cash basis, revenue and expenses appear when money moves. On an accrual basis, they appear when earned or incurred. The same business can show quite different monthly results under each method; see cash vs accrual accounting.

Relationship to the tax return

The income statement is the starting point for the business tax return, but book income and taxable income often differ because of items such as depreciation methods and meal limits. The IRS's Publication 334 explains how small business income and expenses are reported. See also balance sheet.

Related terms

• Accrual Accounting: Accrual accounting records income when it is earned and expenses when they are incurred, regardless of when cash moves.
• Cost of Goods Sold: Cost of goods sold is the direct cost of the products a business sold during a period.
• Gross Profit: Gross profit is revenue minus cost of goods sold, before operating expenses.
• Net Income: Net income is what remains after all expenses are subtracted from revenue for a period.

Browse more definitions in the small business glossary.