An income statement is one of the three financial statements that businesses use to assess their financial health. Here’s why.
The income statement shows a company’s revenue, expenses, and profit over a period of time. This information is important for investors and creditors to understand a company’s financial performance.
The income statement can be prepared using either the accrual basis or the cash basis of accounting. The accrual basis income statement recognizes revenue when it is earned, regardless of when the cash is received. The cash basis income statement only recognizes revenue when the cash is actually received.
The income statement has several important components, including:
Revenue: This is the total amount of money that a company has earned from its operations. It includes sales, interest income, and other forms of revenue.
Expenses: This is the total amount of money that a company has spent on its operations. It includes cost of goods sold, operating expenses, and other forms of expenditure.
Profit: This is the difference between a company’s revenue and expenses. It is also sometimes referred to as net income or net earnings.