Have you been wondering which accounts are found on an Income Statement? Well, we have the answer to your question!
The income statement gives information about the financial results of the business activities of a company over a given time period. The income statement shows how much revenue the company had generated over a period of time and what costs it had to incur while it was in the process of generating that income.
The primary equation that lies under the income statement, if you ignore the profits or losses, is –
Revenue – Expenses = Net Income
The income statement is also commonly known as the “statement of operations,” “profit and loss statement,” or “statement of earnings.”
Under both US GAAP and the International Financial Reporting Standards, the income statement is presented as a separate statement. It is further followed by a statement of comprehensive income.
Which Accounts Are Found On An Income Statement?
Here is a list of the accounts that you may find in an income statement. At the same time, this may vary depending on different regulatory obligations, the diverse needs of the business, and all other connected operating activities.
Revenue Or Sales
This is the very first account that you may find on an income statement. It summarizes the gross sales that a company makes. There are two categories of revenue: operating revenue and non operating revenue.
Operating revenue is the revenue that a company gains by performing all its primary activities, such as manufacturing products or providing services.
Non operating services, on the other hand, are the revenue that a company generates by performing all the activities that are not related to the core business plan, like installing, operating, or maintaining a system.
Cost Of Goods Sold
This refers to the total cost of the sales or the services, which is also known as the incurred cost to develop the goods or services. You need to remember that this account only includes the cost of your company’s products. The cost of goods sold generally does not include all the indirect costs, such as overhead.
Gross profit is the net sales minus the total cost of the goods that a business offers for sale. Net sales are the amount that one brings in for the sold goods, while COGS is the amount that a business spends while manufacturing those goods.
Gains are the result of an optimistic event that results in an increase in the income of an organization. They indicate the amount of money the company obtains from different business activities, such as the sale of a functioning segment.
Likewise, the profits that a business gets from one-time non-business activities are also a part of the business gains—for instance, a business selling off its unused lands or old vehicles.
While gains can be considered secondary revenue, the concepts of the two terms are quite different. Revenue is the amount that a company regularly receives, while gains are accounted for by the sales of fixed assets, which is a rare activity for a business.
Expenses are the costs that a company pays to be able to generate revenue. Some common examples of expenses are employee wages, equipment depreciation, and supplier payments.
You may break down business expenses down into two categories: operating and non operating expenses.
Pension contributions, sales commissions, payroll – all fall operating expenses. On the other hand, expenses like a settlement of a lawsuit or obsolete inventory charges are all under non operating expenses.
Advertising expenses are nothing but the costs of marketing that you need to enlarge the client base. They cover advertisements in the online media and print, as well as video and radio ads.
The cost of advertising comes under the part of the Sales, General, and Administrative expenses.
Administrative expenses are the expenses that a business incurs as a whole rather than secluding within different departments of a company. Some examples of administrative expenses are rent, salaries, office supplies, and traveling expenses.
An administrative expense is constant in nature and continues to exist irrespective of the sales of the company.
Depreciation is the practice of distributing the cost of long term assets over their lifespan. It is a management agreement to write a company’s asset value off, but is also a non cash transaction. Depreciations usually show the value of the asset that the company uses up over a time period.
EBT Or Earnings Before Tax
This is the measurement of the financial performance of the company. You may evaluate EBT by deducting the expenses from income before paying for the taxes. It is one among the line items on a multi step income statement.
Net profit is the amount of money a business earns after deducting the allowable business expenses. You may evaluate it by subtracting the gross expenses from gross revenue.
While net income is the earnings of a company, gross profit is the money that a company earns after deducting its cost of goods sold.
Who Uses An Income Statement?
While you know which accounts are found on an income statement, it is necessary for you to also know who are the exact entities that use an income statement.
There are two key groups of people that use an income statement: internal users and external users.
Internal users are those people who are a part of the management of the company and its board of directors, who make use of this information to analyze where the business is standing and make decisions to generate profits. They may also act out on the concerns regarding the cash flow of the business.
External users comprise the creditors, investors, and competitors of the business. Investors check if the company is in a position to grow further and generate profit in the future so that they can decide if the company is worthy enough for an investment.
Creditors use an income statement to see if the company has enough flow of cash to pay off the loans. Similarly, a competitor uses income statements to know about the parameters of the business and about those areas where the business is spending extra.
The Bottom Line
I am hoping that by now you know which accounts are found on an income statement?
An income is a hefty source of data and information about all the crucial factors that cater to the profits of a business. It gives a timely update as we create it much more frequently than any other business statement.
The income statement reflects all the incomes, expenses, profits, and losses in a company, which we put into mathematical equations to reach the net profit or loss for that accounting period.