How To Prepare Financial Statements: The Income Statement

Since your income statement shows a net profit, you should be certain that anyone reading the statements would come away with a favourable impression. You now understand that the outsider is not looking at the income statement for this period alone. He usually compares your current year’s income with the previous years’ statements to be sure of the progressive financial health of your business.

Your profit and loss statement should properly demonstrate how much your business has earned during a given period of time. Prepare a profit and loss statement by listing all of your business earnings during the given time. Break them down by category, e.g., wholesale and retail sales. Below the income section of your profit and loss statement, list expenses of your business duly broken down by category, like labour, materials, rent, utilities and advertising, etc. Make totals of your earnings and then add your total expenses separately. Work out you net profit by subtracting your total expenses from your total earnings.

Combination of revenue and other gains can form part of your income, where—

• Revenue is the income from operations of your business. This consists of the money you were able to collect from the delivery or manufacture of a product or from providing a service.
• Other gains consist of inflows from sources other than operations, such as capital gains, miscellaneous receipts and losses.

Ensure show clearly and separately these two categories of income on your income statement.

Also state separately any unusual income amounts from operations included this period.

Show the results of your business segment-wise, if there are different business segments in your company. You might have two or more very different and major revenue earning products. Outsiders would want to see income and expenses broken out by segment, particularly when there is significant difference in net profit or in potentiality of comparative growth between such products.

You must show the income from this period in comparison with the income figures reported in earlier periods to ensure reliability of health your business.

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