Looking for an income statement example and explanation? You're at the right place.
The income statement is the first component of our financial statements. It is also known as the profit and loss statement.
The income statement is a report showing the profit or loss for a business during a certain period, as well as the incomes and expenses that resulted in this overall profit or loss. The amount of the profit or loss for a business during a certain period indicates the financial performance of the business.
Note that the above income statement format is for a service business (such as a medical, accounting or legal practice, or a business that provides services such as plumbing, cleaning, consulting, design, etc.). If you would like to see the income statement format for a trading business (a business that buys and sells goods) then check out the lesson on Sales, Cost of Goods Sold and Gross Profit. To see the income statement format for a manufacturing business (a business that makes goods themselves) check out the lesson Accounting for Manufacturing Businesses.
Also note from the income statement example above that a common expense is interest paid (or "bank charges"). Interest is often payable on loans taken from the bank (or taken from other sources). A loan of $10,000 may have an interest rate of 10%. This means that if you haven’t paid the loan back in a year, you would owe $1,000 more ($10,000 x 10%).
Income Statement Accounting Period
An income statement usually covers a year; however this statement may be drawn up for shorter periods, such as one month, three months (quarters) or six months. The period of time that is covered by the income statement (and other financial statements) is called the accounting period.
A regular 12-month accounting period does not necessarily have to begin on the first day of the year and end on the last. Accounting periods can, for example, run from March 1st to February 28th, or July 1st to June 31st, etc. The choice of the accounting period rests with the enterprise itself.
Creating the Income Statement from the Trial Balance
The income statement is drawn up from the figures in the trial balance. Let's look at an example. Our previous trial balance for George’s Catering is shown below.
We will now take the income and expense items and create a simple income statement:
Note that when we are creating an income statement, we only take the incomes and expenses from the trial balance, we ignore everything else (assets, liabilities and owners equity).
Budgeted Income Statements
Budgeted income statements can also be drawn up, showing targeted figures for sales, expenses and profits. These budgeted figures can then be compared to the actual figures and action can be taken to rectify any shortfalls.
In the budgeted income statement above, we can see that the actual profit for the period is about $8,500 less than what was planned for. This was due to the income being $5,400 less ($100,000 – $94,600), and the expenses (such as water and electricity) being greater than expected.
These budgeted figures would normally be drawn up based on actual figures from past years, but taking into account any expected future changes. The budgeted figures (and the way these figures were obtained) could be explained or justified in additional notes to the income statement.