How to prepare an income statement
/What is an Income Statement?
An income statement presents the revenues, expenses, and resulting profit or loss of a business. This information is presented for a reporting period, which is typically for one month, one quarter, or one year. An income statement is one of the three components of a complete set of financial statements, where the other two reports are the balance sheet and statement of cash flows. The following steps will show you how to prepare an income statement.
How to Create an Income Statement
The following sequence of steps illustrates how to create an income statement for your organization.
Step 1: Print the Trial Balance
Go to the accounting software and print the "trial balance" standard report. This is a summary report that contains the ending balance of every account in the general ledger.
Step 2: Determine the Revenue Amount
Aggregate all of the revenue line items on the trial balance and insert the result into the revenue line item in the income statement. This includes not only all revenue line items, but also all revenue contra accounts, which are paired with and offset the revenue accounts. These contra accounts include sales returns and sales allowances.
Step 3: Determine the Cost of Goods Sold Amount
Aggregate all cost of goods sold line items on the trial balance and insert the result into the cost of goods sold line item in the income statement. The cost of goods sold typically includes the costs of direct labor, direct materials, and factory overhead. This line is positioned directly below the revenue line item.
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Step 4: Calculate the Gross Margin
Subtract the cost of goods sold from the revenue figure to arrive at the gross margin. This is the gross amount earned on the sale of products and services.
Step 5: Determine Operating Expenses
Aggregate all of the expense line items below the cost of goods sold in the trial balance, and insert the result into the selling, general and administrative expenses line item in the income statement. This line is positioned directly below the gross margin line item.
Step 6: Calculate Income
Subtract the selling, general and administrative expenses total from the gross margin to arrive at pre-tax income. Insert this calculation at the bottom of the income statement.
Step 7: Calculate the Income Tax
Multiply the applicable tax rate by the pre-tax income number to arrive at the income tax expense. Enter this amount below the pre-tax income number, and also record it in the accounting records with a journal entry.
Step 8: Calculate Net Income
Subtract the income tax from the pre-tax income figure, and enter this amount on the last and final line of the income statement, as the net income figure. A variation is to also include net income as a percentage of revenue.
Step 9: Prepare the Income Statement Header
In the header of the document, identify it as an income statement, include the name of the business, and the date range covered by the income statement. The date range is normally for either a month, quarter, or year.
These steps only note the actions required to manually shift income statement information from the trial balance to a manually-prepared income statement. All accounting software has a standard income statement report that automatically presents the information noted in the preceding steps.
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